C A R N A R V O N P E T R O L E U M L T D 2 0 0 4 t r o p e R l a u n n A C O R P O R A T E D I R E C T O R Y Carnarvon Petroleum Limited ABN 60 002 688 851 Directors AG Shelton (Chairman) NC Fearis (Non-Executive Director) DJ Orth (Executive Director & COO) Company Secretary RA Pullia (Chief Financial Officer) Auditors Ernst & Young Solicitors Freehills Bankers Australia and New Zealand Banking Group Limited Registered Office Level 50 120 Collins Street Melbourne Victoria 3000 Australia Telephone: Facsimile: Email: Website: +61 3 9225 5400 +61 3 9225 5050 admin@carnarvonpetroleum.com www.carnarvonpetroleum.com Share Registry Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Australia +61 3 9415 5000 Telephone: Facsimile: +61 3 9473 2500 Investor Enquiries: 1300 850 505 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 2 0 0 4 A N N U A L R E P O R T C O N T E N T S Chairman’s Report Review and Results of Operations Directors’ Report Corporate Governance Statement Statement of Financial Performance Statement of Financial Position Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Shareholding Information Investor Information The 2004 Annual General Meeting will be held at 10.00am on Tuesday, 30 November 2004 at the Stamford Plaza Melbourne, No. 7 Alfred Place (off Collins Street), Melbourne, Australia. 2 4 10 15 20 21 22 23 47 48 50 52 1 C H A I R M A N ’ S R E P O R T VISION: Carnarvon’s vision is to be a successful niche participant in the oil and gas exploration and production industry in South East Asia and Australia. 2 The Company’s main focus during 2004 continued to be the further exploration and development of the Wichian Buri Oil Field, in which the Company has a 40% interest through its participation in the SW1A Concession Joint Venture. Pacific Tiger Energy Inc. is the joint venture operator and holder of the remaining 60% interest. During the year the Company invested $1.5 million in exploration and development activities.The Joint Venture drilled two field development wells, WB-N7 and WB-N8, as part of the Phase III drilling campaign and one exploration well, Huai Phai-1. WB-N7 was drilled as a horizontal well into exploration licence L44/43 to establish the extension of the Wichian Buri Oil Field to the north outside the existing production licences, PLs 1 and 2. The well did encounter some 105 meters of net horizontal pay along hole but, due to incorrect completion practices, production was not established. WB-N8 was also drilled as a horizontal well with two multilateral holes coming off the central spine. The spine intersected approximately 164 meters of net horizontal pay but, once again, the well was completed improperly although production was established from a bottom hole location within PL 1. Although Huai Phai-1 was not commercially successful, it did add to the overall data base and proved the existence of the F Sandstone reservoir to the west of the Wichian Buri Oil Field. Acquisition of a 3D seismic survey was begun during the year to cover the northern extension of Wichian Buri up to the L44/43 block boundary. The survey was designed to encompass 17 square kilometers making use of the cost efficient mini-Sosie system in an effort to better image the productive F Sandstone and to unravel the structural complexities of the field. Acquisition was halted when the survey was 40% complete due to the onset of the rainy season. The data acquired to date is far superior to earlier surveys and the cost per square kilometer much lower than traditional acquisition. In Western Australia the Company added EP424 to its portfolio during the year. The block is contiguous to EP110 and consolidates the Jasper prospect. The blocks lie in a hydrocarbon fairway proximal to both existing oil and gas production. A seismic program is planned to delineate identified leads and prospects. In Papua New Guinea encouraging engineering studies were conducted over the three gas/condensate discoveries in PRLs 4 and 5. Discussions continue with our partners to determine options to extract value from the blocks. Mindful of the Company’s cash position, corporate overheads are continuously being reviewed and reductions made wherever possible. During the year corporate administration costs were reduced by $335,000 to $1.2 million after excluding the remuneration paid C H A I R M A N ’ S R E P O R T The Company continues to focus on its corporate administration costs and further reductions are anticipated in the current financial year to the former managing director. The Company continues to focus on its corporate administration costs and further reductions are anticipated in the current financial year. The group has reported a strong working capital position at 30 June 2004 of approximately $1 million, including cash reserves of $528,000, a receivable of $100,000 from the SW1A joint venture, and a current investment in Ausam Energy Corporation valued at $460,000, based on recent trades of Ausam shares on the TSX Venture Exchange. During the year Dr Ken Tregonning retired as a director and on behalf of the Board and shareholders I thank him for his past contribution. Mr Rick Pullia joined the Company as our new Chief Financial Officer and Company Secretary in May. Mr Pullia, a chartered accountant, has over 16 years finance, accounting and secretarial experience with local and overseas companies. He has held senior management, commercial and finance roles with companies in the manufacturing and technology sectors and is a welcome addition to the management team. The Company recently announced that it had commenced legal proceedings against its joint venture partner, Pacific Tiger Energy, as a result of its concern about the extent of Pacific Tiger Energy’s funding of the joint venture. Amongst other financial matters, the Company alleges that Pacific Tiger Energy has not provided recent financial and operational information concerning the joint venture, including the final report from Navigator Resource Management Inc. Pacific Tiger Energy commissioned Navigator, on behalf of the joint venture partners, to advise on the status of the Thai operations, options for the remediation of wells WB-N7 and N8 and provision of further information or recommendations on field development. Your Board believes that receipt of this report is essential in order for the Company to be able to review and assess its recommendations, and adequately plan for the next stage of development at Wichian Buri. Your Board did not take this action lightly, but after exhausting all possible alternatives, it was left with no other option. Your directors are committed to resolving this situation as quickly as possible, whilst safeguarding and protecting the Company’s commercial interests. On behalf of the Board I thank you for your continued support. Andrew Shelton Chairman 3 R E V I E W O F O P E R A T I O N S The operating results REVIEW AND RESULTS OF OPERATIONS of the consolidated entity summarised The operating results of the consolidated entity is summarised as follows: Consolidated Consolidated 2004 $ 2003 $ Revenue from oil and gas operations 974,501 1,366,253 Cost of sales (984,346) (1,079,902) Revenue from non-operating activities 17,328 37,937 Corporate administration costs (1,327,774) (1,520,739) Other expenses Project costs Other gains/(losses) (56,817) (6,194) 83,417 (110,198) (62,526) (138,994) Exploration, evaluation and development expenditure written-off (117,159) - Loss before income tax expense (1,417,044) (1,508,169) Income tax expense - - Loss after income tax (1,417,044) (1,508,169) 4 R E V I E W O F O P E R A T I O N S Carnarvon has a 40% interest in the SW1A Joint Venture. The joint venture produced 76,945 barrels of oil during the year. Revenue from oil and gas operations for the year ended 30 June 2004 was $974,501 compared to $1,366,253 in the previous corresponding period, a reduction of $391,752. The consolidated entity’s loss, after income tax, for the year ended 30 June 2004 was $1,417,044, a reduction of $91,125 on the previous corresponding period’s loss of $1,508,169. Carnarvon has a 40% interest in the SW1A Joint Venture. The joint venture produced 76,945 barrels of oil during the year. The average price achieved per barrel sold was US$23.78 and Carnarvon’s share of revenue was $974,501. The decrease in revenue was mainly due to a reduction in the number of barrels sold during the year and the appreciation of the A$ throughout 2004. In the previous financial year 86,324 barrels of oil were produced by the joint venture. The decline in oil production in 2004 was in line with the normal decline profile of the existing wells. There was limited contribution during the year from the Phase III WB-N7 and N8 wells drilled in February 2004 due to completion problems. Cost of sales has also decreased but not to the same extent due to the increase in depreciation expense and a higher amortisation charge against production. During the year the directors determined that estimated ultimate recoverable (EUR) barrels of oil in the fields in which production licences had been granted was a more appropriate basis to amortise carried forward exploration, evaluation and development expenditure, compared to EUR barrels of oil in the joint venture concession area. This resulted in an increase in amortisation charged to cost of sales and a separate charge of $117,159 relating to prior years. Corporate administration costs were reduced by $192,965. After excluding the remuneration paid to the former managing director, corporate administration costs were reduced by $335,361 to $1,185,378. Dr KC Tregonning’s position has not been replaced. Reduced costs were partially offset by increases in statutory compliance and ancillary share issue costs. During the year the consolidated entity raised $3,193,980 through private placements and a 1:5 pro-rata rights issue to shareholders. The proceeds were used to finance further development of the Wichian Buri oilfield, particularly wells N7 and N8. 5 R E V I E W O F O P E R A T I O N S PHASE III DEVELOPMENT OF THE WICHIAN BURI OIL FIELD (Carnarvon Petroleum 40% / Pacific Tiger Energy 60%) Completion of the Phase III drilling campaign over the SW-1A area occurred in February. The drilling of wells HP-1 and WB-N7 and N8, which completed the Phase III development, proved up the existence of an extensive accumulation that allowed Carnarvon to confirm earlier reserve estimates provided by Helix RDS. Northern L44/43 Leads and Prospects Wichian Buri Oilfield and Huai Phai & WB3 Prospects P90 (PROVEN) P50 (PROVEN + PROBABLE) P10 (PROVEN + PROBABLE + POSSIBLE) SW1A Concession area 11 MMBO 23 MMBO 45 MMBO Phase III confirmed the northern extension of the field but also highlighted the variable nature of the reservoir. WB-N7 penetrated 105 meters of net horizontal pay within exploration license L44/43. The well was designed to establish the presence of oil outside PLs 1 and 2 such that application could be made for a new production license. In the event, oil was encountered while drilling and eclectic log interpretations confirmed the presence of hydrocarbons but the methodology used in completing the well did not allow it to be tested properly nor put on stream. Well WB-N8 was drilled as a three legged multilateral well within the existing PLs as an infill well to extract previously discovered oil. A total of 364 meters of net oil bearing sandstone were penetrated in the three legs. As with WB-N7 the well was not completed properly by the operator and, although it is producing, the production has not been optimized. Engineering studies have been commissioned in an effort to determine how best to remediate the wells to both increase production and to make application for a new production license. At year’s end production is at approximately 200 BOPD. WELL PERMIT COUNTRY INTEREST Huai Phai-1 SW1A Thailand WB-N7 WB-N8 6 SW1A SW1A Thailand Thailand 40% 40% 40% METERS 993 tvd COMMENT Wildcat 959 tvd Out step 972 tvd In fill R E V I E W O F O P E R A T I O N S The Estimated Ultimate Recovery of oil over the life of the Field is most likely some 23 million barrels Huai Phai-1 was also drilled as part of the Phase III development. The robust structure was ideally situated to increase the overall reserves of the field and was drilled without incident. Although minor hydrocarbon shows were recorded during drilling operations, no oil was tested. The conclusions drawn from this unsuccessful well were that the F Sandstone reservoir was actually too good in terms of thickness and reservoir properties, and the requisite fault seal to the west was not present to prevent the oil from escaping. Oil has been found in all valid tests drilled within the confines of L44/43 with the exception of Huai Phai and its presence is extensive throughout the Phetchabun Basin. The Estimated Ultimate Recovery (EUR) of oil over the life of the Field is most likely some 23 million barrels of oil (MMBO) within the confines of PLs 1 and 2 and L44/43. The EUR ranges from a Proved volume of 11 MMBO (P90) to a Proved plus Probable plus Possible of 45 MMBO (P10). To date approximately 0.7 MMBO has been produced from the Field so that the most likely remaining volume of oil that can be recovered from the Field is approximately 22 MMBO. These estimates compare favorably to those prepared by Gaffney, Cline and Associates on behalf of Pacific Tiger Energy, given the different methodologies and purpose of the studies. Engineering studies indicate that the key to successful development of Wichian Buri is to drill wells quickly and inexpensively, on a continuous basis, 7 R E V I E W O F O P E R A T I O N S PRLs 4 & 5, Western Papua New Guinea so as to reduce unit cost and offset normal production decline. The actual recovery of oil over the life of the Field will depend on a variety of factors including the scale of the development and in particular the number of wells drilled. The volume of recoverable oil can sustain a much higher level of oil production which can only be achieved by drilling many wells to build production. OTHER EXPLORATION INTERESTS Carnarvon has been closely monitoring the available opportunities within the region and has compiled a slate of opportunities comprised of open acreage both in Asia and in Australia, fields in decline that no longer meet large company hurdle rates and divestitures resulting from mergers and consolidations. A list of like-minded companies has also been constructed and discussions continue with them in an effort to forge a strong alliance with one or more of them. The corporate objective is for a well balanced spread of assets in terms of the nature of the projects, the number of countries in which they 8 reside, and their upside potential both for the hydrocarbon potential and the access to additional projects. PAPUA NEW GUINEA PRL 4 and PRL 5 including the Stanley, Elevala and Ketu discoveries (Carnarvon Petroleum 15%/Santos 35%/InterOil 20%/AWE 15%/TransOrient 7.5%/Horizon 7.5%) Petroleum Retention Licenses 4 and 5 were excised from the original PPL 157 which has since been relinquished. The retained licenses are located in the foreland of the Papuan Basin adjacent to the Irian Jayan border in western Papua New Guinea near the town of Kiunga on the Fly River. The permits contain three gas/condensate discoveries. An engineering study was conducted during the year to evaluate various methodologies to commercially produce liquids. The participants have agreed that further studies should be undertaken by the operator, Santos, to determine how best to commercialize the hydrocarbon accumulations. R E V I E W O F O P E R A T I O N S AUSAM ENERGY CORPORATION Carnarvon owns approximately 2% of Ausam Energy Corporation (formerly AusAm Resources Limited) and retains a royalty of 2.5% by virtue of a sale agreement completed in 2000 over a number of Perth Basin blocks. Ausam Energy Corporation is a public company listed on the TSX Venture Exchange in Canada and has interests in the following permits: Perth Basin EP407 92.5% EP23 EP321 EP414 100.0% 92.5% 51.8% Surat Basin ATP 754P 50.00% ATP 682P 25.00% ATP 470P 35.55% Gippsland Basin PEP 166 50.00% 9 EP110, Western Australia CARNARVON BASIN EP 110/EP 424 (Carnarvon 35%/Strike Oil 40%/Pancontinental 25%) These permits lie onshore/offshore near to Onslow in Western Australia. During the financial year Carnarvon, Strike Oil and Pancontinental agreed to restructure participation interests and to consolidate the two permits. The consolidation of the permits will give Carnarvon a significant interest in 850 square kilometers of prospective exploration acreage The onshore portion of the EP110 permit is adjacent to the producing Tubridgi Gas Field while the combined acreage will cover the whole of the Jasper oil prospect near the producing Roller, Skate and Saladin Oil Fields. A number of additional leads have been identified and will be delineated by the upcoming seismic program. D I R E C T O R S ’ R E P O R T Your directors submit DIRECTORS their report for the year ended 30 June 2004 10 The names and details of the Company’s directors in office during the financial year and until the date of this report are shown below. Directors were in office for this entire period unless otherwise stated. Andrew G Shelton Chairman Bachelor of Arts (Economics and Politics), Master of Arts (Cantab.) Age 57. Appointed Director and Chairman on 1 April 2002. Chairman of the Audit Committee, Remuneration and Nominations Committee, and Governance Committee. Independent corporate finance adviser specializing in strategic and corporate finance advice, capital raisings, mergers and acquisitions, valuations and financial analysis. Principal and director of Andrew Shelton & Co Pty Limited and a non-executive director of Whise Acoustics Limited. Fellow of the Australian Institute of Company Directors, past President & CEO of JP Morgan Canada. Neil C Fearis Non-Executive Director Bachelor of Laws (Hons) Age 53. Appointed Director 30 November 1999. Member of the Audit Committee, Remuneration and Nominations Committee, and Governance Committee. A commercial lawyer with 27 years’ experience of legal practice in London, Sydney and Perth. Principal of the Western Australian-based law firm, Fearis Salter Power Shervington. Chairman of Kresta Holdings Limited and a non-executive director of Capital Growth Corp Limited and Perseus Mining Limited. Member of the Australian Institute of Company Directors and Associate of the Securities Institute of Australia. David J Orth Executive Director & Chief Operating Officer Bachelor of Science, Diploma of GeoSci. Age 55. Appointed Executive Director 14 December 2000. Appointed Chief Operating Officer July 2003. A geologist with in excess of 25 years’ industry experience having worked for Amoco and BHP Petroleum as well as a number of independent oil companies throughout North America, Europe, Africa, the Middle East and Australasia. Member of Petroleum Exploration Society of Australia. Dr Kenneth C Tregonning Mr Tregonning retired from the position of Managing Director and Chief Executive Officer on 28 November 2003, and remained a non-executive director until his resignation from the Board on 5 January 2004. D I R E C T O R S ’ R E P O R T Principal activities Interests in the shares and options of the Company and related bodies corporate continued to be directed Relevant interest in the shares and options of the Company as at the date of this report: towards oil and gas Directors Ordinary Shares Options over Ordinary Shares exploration AG Shelton NC Fearis DJ Orth 9,208,906 3,871,400 1,569,127 1,600,743 300,000 47,428 CORPORATE INFORMATION Corporate structure Carnarvon Petroleum Ltd is a limited liability company incorporated and domiciled in Australia. Carnarvon Petroleum Ltd has prepared a consolidated financial report incorporating the following entities: Entity Name % Ownership Carnarvon Petroleum Ltd Lassoc Pty Ltd S.R.L. Exploration Pty Ltd Strategic Exploration (Asia) Limited 100 100 100 100 Principal activities During the course of the 2004 financial year the consolidated entity’s principal activities continued to be directed towards oil and gas exploration, development and production. 11 D I R E C T O R S ’ R E P O R T Employees The consolidated entity employed 2 employees as at 30 June 2004 (2003: 2 employees). EARNINGS PER SHARE Basic earnings per share Diluted earnings per share DIVIDENDS Cents (0.6) (0.6) ENVIRONMENTAL REGULATION AND PERFORMANCE The consolidated entity’s oil and gas exploration and development activities are concentrated in Western Australia, Thailand and Papua New Guinea. Environmental obligations are regulated under both State and Federal Law in Western Australia, under the Department of Mineral Fuels regulations in Thailand, and under the Oil and Gas Act in Papua New Guinea. No significant environmental breaches have been notified by any government agency during the year ended 30 June 2004. The directors have not recommended the payment of any dividend in respect of the financial year ending 30 June 2004. No dividends were declared or paid during the financial year. SHARE OPTIONS Unissued shares REVIEW AND RESULTS OF OPERATIONS A review of the operations during the financial year of the consolidated entity and the results of those operations is contained in the previous section and the directors adopt and endorse that review which is to be regarded as incorporated herein. As at the date of this report, there were 37,492,101 options to subscribe for shares in the Company exercisable at 6 cents and expiring on 31 December 2005. Option holders are entitled to participate in any new pro-rata issue of securities of the Company only on the prior exercise of the options. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Shares issued as a result of exercise of options There were no significant changes in the state of affairs of the consolidated entity during the financial year. There have been no options exercised during or since the end of the financial year. SIGNIFICANT EVENTS AFTER BALANCE DATE Expiry of options There were no significant events that occurred subsequent to year end other than as disclosed in note 26 to the financial statements. LIKELY DEVELOPMENTS The review of operations outlines likely developments in the operations of the consolidated entity. The directors are not presently in a position to predict the results of those developments. The directors are of the opinion that further information as to the likely developments in the operations of the consolidated entity would prejudice the interests of the Company and the consolidated entity and it has accordingly not been included. 12 On 31 December 2003, 10,000,000 options exercisable at 20 cents each expired. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The Company has arranged Directors and Officers insurance to cover losses or liabilities incurred by a person as an officer of the Company or of a related body corporate as permitted by law. Full details of the cover and premium are not disclosed as the insurance policy prohibits the disclosure. D I R E C T O R S ’ R E P O R T DIRECTORS’ AND OTHER OFFICERS’ EMOLUMENTS The Remuneration and Nominations Committee, established in August 2003, advises the Board on remuneration policies and practices, evaluates the performance of senior management against pre-agreed goals, and makes recommendations to the Board on remuneration for senior management and executive directors. Total non-executive directors’ fees are approved by shareholders and the Board is responsible for the allocation of those fees amongst the individual members of the Board. All directors are eligible to participate in the company’s Employee Share Plan, details of which are disclosed in note (17) to the financial statements. Details of the nature and amount of each element of the emolument of each director and each of the executive officers of the Company are as follows: Emoluments of directors of Carnarvon Petroleum Ltd Annual Emoluments Base Fee $ Termination & Similar Payments $ Long Term Emoluments Superannuation $ Total $ Non-Executive Directors AG Shelton NC Fearis 45,200 27,000 - - 4,800 3,000 50,000 30,000 Executive Directors Dr KC Tregonning DJ Orth 50,000 160,750 80,839 - 11,557 25,000 142,396 185,750 There are no performance bonus plans offered to directors of the Company. Emoluments of executive officers of Carnarvon Petroleum Ltd Annual Emoluments Base Fee $ 16,450 178,959 Long Term Emoluments Superannuation $ 1,481 9,645 RA Pullia TS Irwin Total $ 17,931 188,604 13 D I R E C T O R S ’ R E P O R T The terms ‘director’ and ‘officer’ have been treated as mutually exclusive for the purposes of this disclosure. The value of emoluments have been determined on the basis of cost to the Company and consolidated entity. Executive officers are those directly accountable and responsible for the operational management and strategic direction of the Company and the consolidated entity. DIRECTORS’ MEETINGS During the year, 12 directors’ meetings were held. The number of meetings attended by each director is as follows: Director AG Shelton NC Fearis Dr KC Tregonning DJ Orth Number of Directors’ Meetings Held while in Office Number of Directors’ Meetings Attended 12 12 8 12 11 12 8 12 The Audit Committee met twice during the year with all members present. The Remuneration and Nomination Committee met twice with all members present. The Governance Committee met once with all members present. CORPORATE GOVERNANCE In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Carnarvon Petroleum Ltd support and have adhered to the principles of good corporate governance. The Company’s corporate governance statement is contained in the next section of the Annual Report. Signed in accordance with a resolution of the directors. AG Shelton Director Melbourne 29 September 2004 14 C O R P O R A T E G O V E R N A N C E S T A T E M E N T Practices were in place throughout the year and have followed the guidelines within the Council’s Recommendation The Board of Directors of Carnarvon Petroleum Limited (“the Company”) is responsible for the corporate governance of the consolidated entity. The Board guides and monitors the business and affairs of Carnarvon on behalf of the shareholders by whom they are elected and to whom they are accountable. The format of the Corporate Governance Statement has changed in comparison to the previous year due to the introduction of the Australian Stock Exchange Corporate Governance Council’s (“the Council”) ‘Principles of Good Corporate Governance and Best Practice Recommendations’ (“the Recommendations”). In accordance with the Council’s recommendations, the Corporate Governance Statement must now contain certain specific information and must disclose the extent to which the Company has followed the guidelines during the period. Where a recommendation has not been followed, that fact must be disclosed, together with reasons for the departure. The Company’s Corporate Governance Statement is now structured with reference to the Council’s principles and recommendations, which are as follows: Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the board to add value Principle 3. Promote ethical and responsible decision making Principle 4. Safeguard integrity in financial reporting Principle 5. Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Encourage enhanced performance Principle 9. Remunerate fairly and responsibly Principle 10. Recognise the legitimate interests of stakeholders A description of the Company’s main corporate governance practices is set out below. These practices were in place throughout the year and have followed the guidelines within the Council’s Recommendations, unless otherwise stated. 15 C O R P O R A T E G O V E R N A N C E S T A T E M E N T Principle 1: Lay solid foundations for management and oversight The Board’s primary responsibility is to oversee the Company’s business activities and management for the benefit of shareholders. The key responsibilities of the Board include: (cid:2) Developing long-term corporate objectives and strategy with management and approving plans, new investments, major capital and operating expenditures and major funding activities proposed by management (cid:2) Defining and setting performance expectations for the Company and monitoring actual performance Appointing and reviewing the performance of senior management Assuring itself that there are effective health, safety, environmental and operational procedures in place. Satisfying itself that there are effecting reporting systems that will assure the Board that proper financial, operational, compliance, risk management and internal control processes are in place and function appropriately Satisfying itself that the annual financial statements of the Company fairly and accurately set out the financial position at year end, and the financial performance for the year; and Reporting to and advising shareholders. Principle 2: Structure the board to add value Board Composition The skills, experience and expertise relevant to the position of Director held by each Director in office at the date of this report is disclosed in the Directors’ Report. The composition of the Board, and the term in office held by each Director at the date of this report, is as follows: 16 AG Shelton Chairman, non-executive director 2 years NC Fearis Non-executive director DJ Orth Executive director 5 years 4 years Directors of the Company are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of their unfettered and independent judgement. The Chairman, AG Shelton, is not considered independent as he is a principal and director of a company that provided financial consulting services to Carnarvon during the year. This has resulted in the Company not following Recommendations 2.1 and 2.2, which suggest that a majority of the board be independent directors and the Chairman be an independent director. The Board believes that while the Chairman is not independent and a majority of directors are not independent, the current composition of the Board, given its combined skills and capability, the size of Carnarvon and the scale of its activities, best serve the interests of shareholders. Independent Professional Advice The Directors may, in carrying out their duties to the Company, seek external professional advice. They are entitled to re- imbursement of all reasonable costs where such requests for advice is approved by the Chairman. Remuneration and Nominations Committee The Remuneration and Nominations Committee advises the Board on remuneration policies and practices, evaluates the performance of senior management against pre-agreed goals, and makes recommendations to the Board on remuneration for senior managers. The Committee considers independent advice on policies and practices to attract, motivate, reward and retain strong performers. It is also the Committee’s role to consider the appropriate size and composition of the Board, criteria for Board membership, candidates for Board membership, and the terms and conditions of appointment to the Board. (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) C O R P O R A T E G O V E R N A N C E S T A T E M E N T Directors and employees observe the highest standards of behaviour and business ethics when engaging in corporate activity. The composition of the Board is determined in accordance with the following principles and guidelines: the Board should comprise a majority of non-executive directors; the chairman should be a non- executive director; the Board should comprise directors with an appropriate range of qualifications and expertise; and the Board should meet at least bi-monthly and follow meeting guidelines set down to ensure all directors are made aware of, and have available all necessary information, to participate in an informed discussion of all agenda items. Members of the Remuneration and Nominations Committee are Mr AG Shelton (Chairman) and Mr NC Fearis. The Chief Operating Officer and Company Secretary attend Committee meetings by invitation. The Remuneration Committee was established in December 2002 and its brief was expanded in August 2003 to include Board nominations. Details of these Directors’ qualifications and attendance at Committee meetings are set out in the Directors’ Report. Principle 3: Promote ethical and responsible decision-making The Company recognizes the need for Directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity. Conflict of Interest The Board has approved ‘Conflict-of- Interest Guidelines’ which apply if there is, or may be, a conflict between the personal or other interests of a Director and the business of the Company. In that event, when the matter comes before the Board for discussion, the Director withdraws from the meeting for the period the matter is considered and takes no part in the discussions or decision-making process. Dealing in Company Securities The Company has a share trading policy, binding on Directors and employees, designed to assist Directors and employees to avoid insider trading, and provide guidelines for trading in the Company’s securities. The policy stipulates that the only appropriate time for a Director or employee to acquire or sell Carnarvon securities is when he or she is not in possession of price-sensitive information that is not generally available to the market. Directors wishing to buy or sell the Company’s securities in accordance with the policy may only do so after first having advised the Chairman of his or her intention. In the case of employees, there is a correspondence notification requirement. Principle 4: Safeguard integrity in financial reporting Audit Committee The Audit Committee was established in September 2002 and is the custodian of the external audit relationship and assists 17 (cid:2) (cid:2) (cid:2) (cid:2) C O R P O R A T E G O V E R N A N C E S T A T E M E N T the Board to assure itself that there are effective accounting, auditing, internal control, business risk management, compliance and reporting systems, processes and practices in place. The Audit Committee consists of Mr AG Shelton (Chairman) and Mr NC Fearis. The external auditors, the Chief Operating Officer and the Chief Financial Officer attend Committee meetings by invitation. Details of these Directors’ qualifications and attendance at audit committee meetings are set out in the Directors’ Report. The Audit Committee further requires that the Company’s Chief Executive Officer (or equivalent) and Chief Financial Officer annually certify that the Company’s financial statements present a true and fair view, in all material respects, of the Company’s financial condition and operating results and are in accordance with relevant accounting standards, and that the integrity of the financial statements are founded on a sound system of risk management and internal compliance and control which, in all material respects, implements the policies adopted by the Board. Principle 5: Make timely and balanced disclosure The Company follows the disclosure requirements of the Corporations Act 2001 and the ASX Listing Rules, in particular: (cid:2) Continuous disclosure – which is its core disclosure obligation and primary 18 method of informing the market and shareholders Periodic disclosure – in the form of full-year, half-year reporting and quarterly reporting Specific information disclosure – as and when required, of administrative and corporate details, usually in the form of ASX releases. Directors are committed to the promotion of investor confidence by ensuring that trade in the Company’s securities takes place in an efficient, competitive and informed market. In compliance with ASX continuous disclosure requirements, the Company has procedures in place to ensure that all price sensitive information is identified, reviewed by senior management and disclosed to the ASX in a timely manner and that all information provided to the ASX is immediately available to shareholders and the market on the Company’s website. The Company is in the process of preparing written policies and procedures on information disclosure that will be available in a separate Corporate Governance section of the Company’s website. Principle 6: Respect the rights of shareholders The Board aims to ensure that shareholders are kept informed of all major developments affecting the Company. Information is communicated to shareholders through: Annual and Half Yearly Reports; The Chairman’s Address delivered at the Annual General Meeting; (cid:2) Notice of all meetings of shareholders and explanatory notes of proposed resolutions; Shareholder mailing list allowing each ASX release to be forwarded by email directly to every shareholder on the list; and (cid:2) Company website www.carnarvonpetroleum.com offering shareholders access to ASX releases, company media releases and other company data. Shareholders are encouraged at Annual General Meetings to ask questions of Directors and senior management and also the Company’s external auditors, who are required to be in attendance. Principle 7: Recognise and manage risk The Board has as one of its main objectives the oversight of the management of areas where risk to the Company is perceived to be significant. Board papers and management presentations routinely address the risks associated with proposals submitted to the Board for approval. The Company formed a Governance Committee in August 2003 which has two roles. It advises on and monitors the Company’s governance practices and assists the Board to assure itself that there is an appropriate and effective process for the direction and control of the Company. (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) C O R P O R A T E G O V E R N A N C E S T A T E M E N T Governance practices In particular it: assist the Board to assure itself that there is an appropriate and effective process for the direction and control of the Company (cid:2) monitors the management systems and processes in place for compliance with laws and regulatory requirements, and (cid:2) monitors the management systems in place for addressing significant business risks and the framework of internal management controls. Members of the Governance Committee are Mr AG Shelton (Chairman) and Mr NC Fearis. The Chief Operating Officer and Chief Financial Officer attend Committee meetings by invitation. The Committee will prepare a written risk management strategy that will be posted on the Company’s website when it is approved by the Board. This will be completed during the next reporting period. Principle 8: Encourage enhanced performance The performance of the Board, its committees and each individual director, is to be evaluated by the Remuneration and Nominations Committee. A formal review procedure will be prepared and a performance evaluation conducted during the next reporting period. Principle 9: Remunerate fairly and responsibly Non-executive directors are paid directors’ fees out of the maximum aggregate amount approved by shareholders for the remuneration of non-executive directors. A discussion of the Remuneration Committee and its role is disclosed in Principle 2. Remuneration of directors and executives is disclosed in the Directors’ Report. Principle 10: Recognise the legitimate interests of stakeholders The Company is developing a Code of Conduct and Business Ethics that will formally document the Company’s approach to all stakeholders. A copy of this Code will be available in a separate Corporate Governance section of the Company’s website. Disclosure on the Company’s website Some of the Council’s Recommendations suggest that several policies and procedures dealt with by Recommendations should be available on the Company’s website in a section clearly marked for corporate governance. The Company currently does not have a separate corporate governance section on its website but will introduce one in the current reporting period and will include those matters recommended for inclusion by the Council. 19 S T A T E M E N T O F F I N A N C I A L P E R F O R M A N C E F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 4 REVENUE FROM ORDINARY ACTIVITIES Cost of sales General administration Directors’ emoluments Salaries and employee benefits Legal and consulting fees Other expenses from ordinary activities Other gains/(losses) Project costs Exploration, evaluation and development expenditure written-off LOSS FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE INCOME TAX EXPENSE RELATING TO ORDINARY ACTIVITIES LOSS FROM ORDINARY ACTIVITIES AFTER INCOME TAX EXPENSE Notes Consolidated Carnarvon Petroleum Ltd 2(a) 2(b) 2(c) 2(d) 2004 $ 2003 $ 2004 $ 2003 $ 991,829 1,404,190 17,328 37,937 (984,346) (1,079,902) – – (554,865) (434,230) (554,865) (434,230) (408,146) (442,160) (408,146) (442,160) (183,934) (281,851) (183,934) (281,851) (144,736) (228,954) (144,736) (228,954) (92,910) (243,742) (92,910) (243,742) 83,417 (138,994) 85,159 (709,430) (6,194) (62,526) (6,194) (62,526) 2(e) (117,159) – – – (1,417,044) (1,508,169) (1,288,298) (2,364,956) 3 – – – – (1,417,044) (1,508,169) (1,288,298) (2,364,956) NET LOSS ATTRIBUTABLE TO MEMBERS OF CARNARVON PETROLEUM LTD (1,417,044) (1,508,169) (1,288,298) (2,364,956) Capital raising costs (232,756) (146,574) (232,756) (146,574) TOTAL REVENUES, EXPENSES AND VALUATION ADJUSTMENTS ATTRIBUTABLE TO MEMBERS OF CARNARVON PETROLEUM LTD AND RECOGNISED DIRECTLY IN EQUITY TOTAL CHANGES IN EQUITY OTHER THAN THOSE RESULTING FROM TRANSACTIONS WITH OWNERS AS OWNERS ATTRIBUTABLE TO MEMBERS OF CARNARVON PETROLEUM LTD Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 20 (232,756) (146,574) (232,756) (146,574) (1,649,800) (1,654,743) (1,521,054) (2,511,530) 25 25 (0.6) (0.6) (0.9) (0.9) S T A T E M E N T O F F I N A N C I A L P O S I T I O N A S A T 3 0 J U N E 2 0 0 4 CURRENT ASSETS Cash assets Receivables Inventories Other financial assets Other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Plant and equipment Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 527,882 357,112 504,556 321,383 246,191 140,603 44,771 16,164 104,841 282,876 73,359 - – 282,876 - - 76,225 68,806 6,200 7,000 1,238,015 639,880 838,403 344,547 61,265 158,160 3,593,282 2,029,285 - 212,697 1,482,962 1,695,659 190,188 171,950 6,089 19,399 4 5 7 6 4 7 9 Deferred exploration, evaluation and development costs 10 5,722,278 4,387,531 – – TOTAL NON-CURRENT ASSETS 5,973,731 4,930,338 5,082,333 3,744,343 TOTAL ASSETS CURRENT LIABILITIES Payables Provisions TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Accumulated losses TOTAL EQUITY 7,211,746 5,570,218 5,920,736 4,088,890 259,322 369,798 156,880 205,784 880 25,812 880 25,812 260,202 395,610 157,760 231,596 260,202 395,610 157,760 231,596 6,951,544 5,174,608 5,762,976 3,857,294 45,318,074 42,124,094 45,318,074 42,124,094 (38,366,530) (36,949,486) (39,555,098) (38,266,800) 6,951,544 5,174,608 5,762,976 3,857,294 11 12 13 14 21 S T A T E M E N T O F C A S H F L O W S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 994,871 1,318,422 – – Payments to suppliers and employees (2,421,370) (2,641,243) (1,381,490) (1,506,000) Interest received Exploration costs NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES 17,328 10,740 17,328 10,740 (6,194) (62,526) (6,194) (62,526) 15(a) (1,415,365) (1,374,607) (1,370,356) (1,557,786) Purchase of interests in permits – (19,075) Exploration and development expenditure (1,515,074) (1,920,397) Contributions for development expenditure – 1,473,704 – – – (19,075) – 1,473,704 Purchase of plant & equipment Advances to controlled entities NET CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES (86,205) (126,804) (4,713) (17,831) – – (1,635,738) (1,913,920) (1,601,279) (592,572) (1,640,451) (477,122) Proceeds from issue of shares & options 3,426,736 1,977,075 3,426,736 1,977,075 Capital raising costs (232,756) (146,574) (232,756) (146,574) Proceeds from sale of employee shares disposed of by the Company as agent NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES – 27,197 – 27,197 3,193,980 1,857,698 3,193,980 1,857,698 NET INCREASE/(DECREASE) IN CASH HELD 177,336 (109,481) 183,173 (177,210) Cash at beginning of period Effects of foreign exchange rate changes on cash 357,112 466,928 321,383 498,593 (6,566) (335) – – CASH AT END OF PERIOD 15(b) 527,882 357,112 504,556 321,383 22 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of accounting The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 including applicable Accounting Standards. Other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) have also been complied with. The financial report has been prepared in accordance with the historical cost convention. Going concern The consolidated financial report has been prepared on a going concern basis, which contemplates continuity of normal business activities and realisation of assets and discharge of liabilities in the ordinary course of business. The consolidated entity has incurred an operating loss of $1,417,044 for the financial period ended 30 June 2004. The ability of the consolidated entity to continue as a going concern, including the ability of the consolidated entity to pay its debts as and when they fall due, is dependent upon: • • • oil sales revenue derived from the SW1A Joint Venture; generation of future profits from the SW1A Joint Venture; and injection of capital Without the generation of future profits and the injection of capital, there is significant uncertainty as to whether the consolidated entity will be able to continue as a going concern and therefore whether it will be able to realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. It is on the basis that the consolidated entity will generate profits in the future from oil sales derived from the SW1A Joint Venture and an injection of capital will occur to cover future exploration and development expenditure, that the directors have prepared the financial report on a going concern basis. Consequently, no adjustments have been made relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern. (b) Changes in accounting policies The accounting policies adopted are consistent with those of the previous year. (c) Cash and cash equivalents Cash on hand and in banks and short-term deposits are stated at nominal value. For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks, and money market investments at call readily convertible to cash. (d) Recoverable amount Non-current assets measured using the cost basis are not carried at an amount above their recoverable amount, and where carrying values exceed this recoverable amount, the asset is written down. In determining recoverable amount, the expected net cash flows have been discounted to their present value. (e) Investments Listed shares are classified as current investments and valued at the lower of cost and recoverable amount. Other non-current investments are carried at the lower of cost and recoverable amount. (f) Plant and equipment Cost and valuation All classes of plant and equipment are measured at cost. 23 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Depreciation Depreciation is provided on a straight-line basis on all plant and equipment. Major depreciation periods for plant and equipment are between 2 and 5 years (2003: 2 and 5 years). (g) Joint ventures Interest in the joint venture operation is recognised by including in the respective classifications, the share of individual assets employed and share of liabilities and expenses incurred. (h) Exploration, evaluation and development costs Costs carried forward Costs arising from exploration and evaluation activities are carried forward provided such costs are expected to be recouped through successful development, or by sale, or where exploration and evaluation activities have not, at reporting date, reached a stage to allow a reasonable assessment regarding the existence of economically recoverable reserves. Amortisation Costs on productive areas are amortised over the life of the area of interest to which such costs relate on the production output basis. (i) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries and annual leave. Sick leave is not accrued as it is not of a material nature and any entitlement is not vested on termination of employment. Liabilities arising in respect of wages and salaries, annual leave and any other employee entitlements expected to be settled within twelve months of the reporting date are measured at their nominal amount based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used. Employee benefit expenses and revenues arising in respect of the following categories: • • wages and salaries, non-monetary benefits, annual leave and other leave entitlements; and other types of employee benefits are recognised against profits on a net basis in their respective categories. The value of the employee share scheme described in note 17 is not being charged as an employee benefits expense. Any contributions made to superannuation plans are recognized against profits when due. (j) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Control of the goods has passed to the buyer. Interest Control of the right to receive the interest payment. (k) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. 24 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis. (m) Principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising Carnarvon Petroleum Ltd (the parent company) and all entities that Carnarvon Petroleum Ltd controlled from time to time during the year and at reporting date. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. (n) Foreign currencies Translation of foreign currency transactions Transactions in foreign currencies of entities within the consolidated entity are converted to local currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at reporting date are translated using the spot rate at the end of the financial year. All exchange differences arising from the translation of assets and liabilities are recognised as revenues and expenses for the financial year. Translation of financial reports of overseas operations Strategic Exploration (Asia) Limited (“SEAL”), a wholly owned subsidiary, is accounted for in its functional currency, being the US dollar. SEAL is an integrated operation with its financial report being translated using the temporal rate method and any exchange differences are taken directly to the Statement of Financial Performance. (o) Taxes Income taxes Tax effect accounting is applied using the liability method whereby income tax is regarded as an expense and is calculated on the accounting profit after allowing for permanent differences. To the extent timing differences occur between the time items are recognised in the financial statements and when items are taken into account in determining taxable income, the net related taxation benefit or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision for deferred income tax. The net future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being recognised. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: • • where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. 25 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (p) Earnings per share Basic EPS is calculated as net profit or loss attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net profit or loss attributable to members, adjusted for: • • • costs of servicing equity (other than dividends); the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and other non-discretionary changes in revenue or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (q) Contributed equity Issued and paid up capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. (r) Payables Liabilities for trade creditors and other amounts are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the consolidated entity. Payables to related parties are carried at the principal amount. Interest, when charged by the lender, is recognised as an expense on an accrual basis. (s) Receivables Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as income on an accrual basis. (t) Provision for rehabilitation The provision for rehabilitation is recognised when the liability arises from production. The directors believe that the rehabilitation provision is not material at this stage of production and therefore a provision for restoration has not been recorded in the financial statements. (u) Employee share loans The carrying value of advances made to eligible employees is the lower of the equivalent market value of the shares from time to time or the price of the shares at the time the shares were issued to eligible employees. (v) Inventories Inventories relate to warehouse stores and materials. These represent consumable supplies and maintenance spares expected to be used in production and are valued at the lower of cost and net realisable value. Cost comprises purchase, inspection and transportation costs. 26 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 2. PROFIT/(LOSS) FROM ORDINARY ACTIVITIES Loss from ordinary activities before income tax is arrived at after taking into account: (a) Revenue from ordinary activities Revenue from operating activities: Oil and Gas operations Oil Revenue – SW1A joint venture 974,501 1,366,253 Total revenue from operating activities 974,501 1,366,253 – – – – Revenue from non-operating activities Interest – other persons/corporations 17,328 10,740 17,328 10,740 Proceeds from the sale of employee shares disposed of by the Company as agent Total revenue from non-operating activities – 17,328 27,197 37,937 Total revenue from ordinary activities 991,829 1,404,190 – 17,328 17,328 27,197 37,937 37,937 (b) Cost of sales Production Royalty and excise Transportation Depreciation of production assets Amortisation Selling, general and administration Total cost of sales (301,907) (354,225) (162,406) (224,538) (69,429) (95,204) (49,944) (33,333) (93,146) (15,342) (307,514) (357,260) (984,346) (1,079,902) – – – – – – – – – – – – – – 27 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 2. PROFIT/(LOSS) FROM ORDINARY ACTIVITIES (continued) (c) Other expenses from ordinary activities Depreciation – plant & equipment (7,849) (11,528) (7,849) (11,528) Rental premises – operating lease (36,093) (133,544) (36,093) (133,544) Carrying value of employee loans for shares sold Provision for non-recovery of employee share loans Interest expense Total other expenses from ordinary activities (d) Other gains/(losses) – (42,500) – (42,500) (47,820) (56,170) (47,820) (56,170) (1,148) – (1,148) – (92,910) (243,742) (92,910) (243,742) Net loss on disposal of plant & equipment (10,174) – (10,174) – Increment/(decrement) in value of investment Unrealised foreign exchange gain/(loss) on: 70,179 (70,179) 70,179 (70,179) Translation of integrated subsidiary 23,412 (68,815) – – 83,417 (138,994) – 25,154 85,159 – (639,251) (709,430) Loan to subsidiary Total other gain/(losses) (e) Specific item Exploration, evaluation and development expenditure written-off (117,159) – – – During the year the directors determined that estimated ultimate recoverable (EUR) barrels of oil in the fields in which production licences had been granted was a more appropriate basis to amortise carried forward exploration, evaluation and development expenditure, compared to EUR barrels of oil in the joint venture concession area. This resulted in a write-off of $117,159 to reflect the adjustment to the carried forward expenditure balance as if this basis had been adopted in the prior year. 28 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 3. INCOME TAX The prima facie income tax on operating loss differs from the income tax provided in the financial statements as follows: Prima facie income tax benefit on operating loss 425,113 452,451 386,489 709,487 Tax effect of permanent differences: Foreign sourced income/(loss) Foreign sourced project costs Exploration, evaluation & development (2,954) (1,550) 85,905 (5,603) – – (1,550) (5,603) expenditure written-off (35,148) Receipt from Gemini – (409,347) – – (409,347) Increment/(decrement) in value of investment 21,054 (21,054) 21,054 (21,054) Non-deductible expenditure (17,993) (40,468) (22,294) (40,468) Current year tax benefit not brought to account (388,522) (61,884) (383,699) (233,015) Income tax benefit attributable to operating loss – – – – Income tax losses Future income tax benefit arising from tax losses of a controlled entity not brought to account at balance date as realisation of the benefit is not regarded as virtually certain This future income tax benefit will only be obtained if: 1,795,424 1,406,902 1,961,327 1,577,628 (a) future assessable income is derived of a nature and an amount sufficient to enable the benefit to be realised; (b) the conditions for deductibility imposed by tax legislation continue to be complied with; and (c) no changes in tax legislation adversely affect the consolidated entity in realising the benefit. Tax Consolidation As at the date of this report, the Carnarvon Petroleum Ltd Group has not yet decided whether and when it will be consolidating for tax purposes. However, as there are no provisions for deferred tax liabilities or future income tax benefits brought to account in this financial report, the decision about Tax Consolidation is not expected to have a material effect. 29 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 4. RECEIVABLES CURRENT Trade debtors Other debtors Receivable from SW1A joint venture NON-CURRENT Permit security deposits Amounts receivable from controlled entities Provision for non-recovery Employee share loans Provision for non-recovery Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 4(a) 4(a) 4(a) 17(a) 17(a) 96,097 50,316 99,778 116,466 24,137 – – – 44,771 16,164 – – 246,191 140,603 44,771 16,164 1,490 50,565 1,490 50,565 – – – – – – 4,225,366 2,564,474 (693,349) (693,349) 3,532,017 1,871,125 478,900 478,900 478,900 478,900 (419,125) (371,305) (419,125) (371,305) 59,775 61,265 107,595 59,775 107,595 158,160 3,593,282 2,029,285 (a) Terms and Conditions Terms and conditions relating to the above financial assets: (i) Trade debtors are generally settled in the month after invoicing. (ii) Details of the terms and conditions of related party receivables are set out in note 22. 5. INVENTORIES CURRENT Production materials – at lower of cost and net realisable value 104,841 73,359 – – 6. OTHER CURRENT ASSETS Prepayments and other current assets 76,225 68,806 6,200 7,000 30 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 7. OTHER FINANCIAL ASSETS CURRENT Shares in AusAm Resources Limited – at cost NON-CURRENT Shares in controlled entities – at cost Shares in AusAm Resources Limited – at cost Provision for diminution of investment (i) 24 (i) 282,876 – – – – – – 282,876 (70,179) 282,876 – 1,482,962 1,482,962 – – 282,876 (70,179) 212,697 1,482,962 1,695,659 (i) At 30 June 2004 AusAm Resources Limited was an unlisted public company in which Carnarvon Petroleum Limited held a 3.0% (2003: 6.7%) ownership interest. Its main activity is the exploration and development of oil and gas. Refer to note 26 – Subsequent Events and note 1(e) Accounting Policies. 8. JOINT VENTURES The economic entity has the following interests in joint venture operations: Joint Venture Principal Activities Ownership Interest % Related Party % Thailand SW1A Concession, Exploration Block L44/43 Western Australia (Carnarvon Basin) Exploration, development, production and marketing of crude oil EPs110 & 424 Exploration for hydrocarbons 40% 35% Papua New Guinea (Papuan Basin) PRLs 4 & 5 including the Stanley, Elevala and Ketu discoveries Exploration for hydrocarbons 15% – – – 31 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 8. JOINT VENTURES (continued) Assets and liabilities relating to the joint ventures are included in the financial statements as follows: CURRENT ASSETS Cash assets Receivables Inventories Prepayments and other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and equipment Exploration, evaluation and development costs TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables TOTAL LIABILITIES NET ASSETS Capital expenditure commitments and contingent liabilities in respect of the joint venture are disclosed in Notes 16 and 18 respectively. 23,305 35,729 101,642 124,440 104,841 70,025 73,359 61,806 299,813 295,334 184,099 150,556 5,722,278 4,387,531 5,906,377 4,538,087 6,206,190 3,833,421 79,952 79,952 92,635 92,635 6,126,238 4,740,786 – –- – – – – – – – – – – – – – – – – – – – – – – 32 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 9. PLANT AND EQUIPMENT Plant and equipment at cost Accumulated depreciation (a) Reconciliation Reconciliation of the carrying amount of plant and equipment at the beginning and end of the current financial year Plant and equipment Carrying amount at beginning Additions Disposals Depreciation expense Carrying amount at end of financial year Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 298,692 257,483 11,316 51,599 (108,504) (85,533) (5,227) (32,200) 9(a) 190,188 171,950 6,089 19,399 Consolidated 2004 Consolidated 2003 171,950 86,206 (10,175) (57,793) 190,188 90,007 126,804 – (44,861) 171,950 Consolidated 2004 $ 2003 $ Carnarvon Petroleum Ltd 2004 $ 2003 $ 10. DEFERRED EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE Exploration, evaluation and development costs carried forward in respect of the SW1A Concession: Production Exploration & development phases 5,972,454 4,427,402 Less: accumulated amortisation (250,176) (39,871) 5,722,278 4,387,531 – – The ultimate recoupment of costs carried forward is dependent on the successful development and commercial exploitation or sale of the SW1A Concession. – – 33 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 11. PAYABLES CURRENT Trade creditors Other creditors Payables to controlled entities Cash calls payable to SW1A JV Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 11(a) 11(a) 59,642 25,865 – – 199,680 283,933 156,880 145,784 – – – 60,000 – – 60,000 – 259,322 369,798 156,880 205,784 (a) Terms and Conditions Terms and conditions relating to the above financial liabilities: (i) Trade and other creditors are non-interest bearing and are normally settled on 30 day terms. 12. PROVISIONS CURRENT Employee leave entitlements 17 880 25,812 880 25,812 13. CONTRIBUTED EQUITY (a) Issued and paid up capital Ordinary shares fully paid 45,318,074 42,124,094 45,318,074 42,124,094 (b) Movements in shares on issue 2004 2003 Beginning of the financial year 171,591,623 42,124,094 124,518,423 40,293,593 Number of Shares $ Number of Shares $ Issued during the year – public equity raising less transaction costs 100,720,890 3,426,736 47,073,200 1,977,075 – (232,756) – (146,574) End of the financial year 272,312,513 45,318,074 171,591,623 42,124,094 34 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 13. CONTRIBUTED EQUITY (continued) (c) Share options During the financial year 37,492,101 options over ordinary shares were issued. Unissued ordinary shares of the Company under option: Expiry Date Grant Date Exercise Price Number of Options 31 December 2005 31 December 2003 (since expired) 22/03/2004 07/12/2000 (d) Terms and conditions of contributed equity Ordinary Shares $ 0.06 0.20 2004 2003 37,492,101 – – 10,000,000 Ordinary shares have the right to receive dividends as declared and, in the event of a winding-up of the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of, and amounts paid up on, shares held. Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 14. ACCUMULATED LOSSES Balance at the beginning of the year (36,949,486) (35,441,317) (38,266,800) (35,901,844) Operating loss attributable to members of Carnarvon Petroleum Ltd (1,417,044) (1,508,169) (1,288,298) (2,364,956) Balance at the end of the year (38,366,530) (36,949,486) (39,555,098) (38,266,800) 35 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 15. STATEMENT OF CASH FLOWS (a) Reconciliation of the operating loss after tax to the net cash flows used in operations Loss from ordinary activities after tax (1,417,044) (1,508,169) (1,288,298) (2,364,956) Provision for diminution – employee share loans Write down of employee loans Amortisation and write-off of deferred exploration, evaluation and development costs Depreciation – plant & equipment Net loss on disposal of plant & equipment Unrealised foreign exchange (gain)/loss (Increment)/decrement in value of investment Changes in assets and liabilities: (Increase)/decrease in receivables (Increase)/decrease in inventories (Increase)/decrease in other current assets Increase/(decrease) in payables 47,820 – 210,305 57,793 10,174 (23,412) (70,179) (56,513) (31,482) (7,419) (110,476) 56,170 15,303 15,342 44,861 - 68,815 70,179 (47,831) (7,801) (13,311) (88,963) Increase/(decrease) in employee entitlements (24,932) 20,798 47,820 – – 7,849 10,174 56,170 15,303 – 11,528 – (25,154) 639,251 (70,179) 70,179 20,468 – 800 (48,904) (24,932) 872 – 7,931 (14,862) 20,798 Net cash flows used in operating activities (1,415,365) (1,374,607) (1,370,356) (1,557,786) (b) Reconciliation of cash Cash balance comprises: Cash at bank and at call Closing cash balance (c) Financing facilities available At balance date the following financing facilities were available: Bank overdraft Letter of credit The bank overdraft facility is unused at balance date. 527,882 527,882 357,112 357,112 504,556 504,556 321,383 321,383 30,000 – 30,000 60,000 30,000 – 30,000 60,000 36 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ – – – – 16. EXPENDITURE COMMITMENTS (a) Capital expenditure commitments Estimated capital expenditure contracted for at balance date, but not provided for, payable: Not later than one year Joint venture (b) Lease expenditure commitments Operating lease (non cancellable) Not later than one year 9,450 33,600 9,450 33,600 Aggregate lease expenditure contracted for at balance date Aggregate expenditure commitments comprise: Amounts not provided for at balance date 9,450 33,600 9,450 33,600 Rental commitments 9,450 33,600 9,450 33,600 Operating lease refers to rental of office space which has a term of less than one year. Due to the nature of the consolidated entity's operations in exploring and evaluating areas of interest, it is difficult to accurately forecast the nature or amount of future expenditure, although it will be necessary to incur expenditure in order to retain the entity's present permit interests. Expenditure commitments on exploration permits can be reduced by selective relinquishment of exploration tenure, by the renegotiation of expenditure commitments, or by farming out portions of the entity's equity. The Company forecasts its expenditure for exploration commitments for the year ending 30 June 2005 to be approximately $100,000 (actual 2004: $18,384). 17. EMPLOYEE ENTITLEMENTS Aggregate employee entitlements, including on-costs The aggregate employee entitlement liability comprises: Provisions (Current) 12 880 25,812 880 25,812 37 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 17. EMPLOYEE ENTITLEMENTS (continued) (a) Employee share plan At the Annual General Meeting held on 16 October 1997 the shareholders approved the Carnarvon Employee Share Plan and a loan arrangement scheme to assist in funding the acquisition of Plan Shares. Under the terms of the Plan: (i) the Company may, in its absolute discretion, make an offer of ordinary fully paid shares in Carnarvon Petroleum Ltd to any eligible employee; (ii) an eligible employee is any person who is a director or employee of Carnarvon Petroleum Ltd or any of its subsidiaries; (iii) the issue price is determined by the directors and is not to be less than the weighted average market price of the Company’s shares on the five trading days prior to the proposed date of offer; (iv) transfer of shares is limited within the first two years; (v) eligible employees receive an interest free advance to acquire the shares; (vi) the maximum liability of the advance is the market value of the shares from time to time; (vii) the carrying value of advances made to eligible employees is the lower of the equivalent market value of the shares from time to time or the price of the shares at the time the shares were issued to eligible employees; (viii) the eligible employee is the legal owner of the shares subject to the provisions of the loan agreement between the Company and the eligible employee; (ix) Australian Stock Exchange Listing Rules require the Company to obtain shareholder approval for the issue of shares to directors; and (x) the Company is empowered to sell, as agent, any shares held under the Plan by an eligible employee upon the cessation of his employment, and to apply the net sale proceeds in discharging the employee’s loan from the Company. At balance date there were 10 (2003: 10) eligible participant employees. During the financial year, no (2003: nil) shares were issued under the Plan. In respect to the eligible employee who ceased employment during the year, no (2003: Nil) shares were disposed of by the Company as agent. During the year, no amounts (2003: $nil) were repaid under the loan arrangement scheme. During the year the Company as agent did not sell any shares (2003: 500,000) on market for employees who ceased employment in previous years. In 2003 shares were disposed of on market for a consideration of $27,197. At balance date, there were 3,985,000 (2003: 3,985,000) shares on issue under the Plan, with a market value of $59,775 (2003: $107,595). 38 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 17. EMPLOYEE ENTITLEMENTS (continued) (b) Superannuation Commitments Employees make contributions to individual superannuation plans based on various percentages of their salary and wage. The consolidated entity has a legal obligation to contribute to the plans to the extent of the superannuation guarantee legislation and the specific terms of individual employment contracts. Notes Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ Employer contributions to the plans 46,127 55,917 46,127 55,917 18. CONTINGENT ASSETS AND CONTINGENT LIABILITIES Controlled Entities (a) Carnarvon Petroleum Ltd has agreed not to recall the loans owing by its controlled entities where it would result in the controlled entity not being able to meet its debts and commitments as they fall due. (b) In accordance with normal petroleum industry practice, the consolidated entity has entered into joint ventures and farmin agreements with other parties for the purpose of exploring and developing its petroleum permit interests. If a party to a joint venture defaults and does not contribute its share of joint venture obligations, then the other joint venturers are liable to meet those obligations. In this event, the interest in the permit held by the defaulting party may be redistributed to the remaining joint venturers. (c) Securities have been placed in favour of the Independent State of Papua New Guinea in respect of the compliance with the conditions of Petroleum Prospecting Licences (PPL’s) granted to the Company and its joint venturers, totalling $1,490 (2003: $31,490). (d) If a discovery is made within an Australian exploration permit in which a Native Title claim has been made and a production licence is sought in respect of that exploration permit, the issue of the production licence may be subject to the right to negotiate procedures set out in the Native Title Act. If no agreement is reached with the claimants, the National Native Title Tribunal will conduct a hearing to determine whether the licence can be granted, and if so on what conditions. A condition of the grant may be the payment of compensation. 19. SEGMENT INFORMATION The consolidated entity operated predominantly in oil and gas exploration and development in Australia, Thailand and Papua New Guinea. Segment accounting policies Segment accounting policies are the same as the consolidated entity’s policies as described in note 1. During the financial year, there were no changes in segment accounting policies that had a material effect on the segment information. 39 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 19. SEGMENT INFORMATION (continued) Geographical Segments Australia Thailand Papua New Guinea Consolidated 2004 $ 2003 $ 2004 $ 2003 $ 2004 $ 2003 $ 2004 $ 2003 $ Revenue Sales to customers outside the consolidated entity Other revenue from outside the consolidated entity Total segment revenue Results Operating result Specific item Total segment result Assets Exploration and development costs – – 974,501 1,366,253 17,328 37,937 – – 17,328 37,937 974,501 1,366,253 (1,290,040) (1,692,372) (9,845) 184,203 – – (117,159) – (1,290,040) (1,692,372) (127,004) 184,203 – – 5,722,278 4,327,531 – – – – – – – – – – – – – 974,501 1,366,253 17,328 37,937 991,829 1,404,190 (1,299,885) (1,508,169) (117,159) – (1,417,044) (1,508,169) – 5,722,278 4,327,531 Other 904,267 630,905 583,711 501,217 1,490 50,565 1,489,468 1,182,687 Total segment assets Liabilities Total segment liabilities Other segment information: Acquisition of property, plant and equipment and other non-current assets Depreciation Amortisation Other non-cash expenses 40 904,267 630,905 6,305,989 4,828,748 1,490 50,565 7,211,746 5,510,218 157,760 171,596 102,442 164,014 4,713 7,849 – 17,831 11,528 81,493 108,973 49,944 – 210,305 33,333 15,342 47,820 126,349 – – – – – – – – 260,202 335,610 – – – – 86,206 126,804 57,793 210,305 44,861 15,342 47,820 126,349 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 20. DIRECTOR AND EXECUTIVE DISCLOSURES Specified Directors The following persons were directors of Carnarvon Petroleum Limited during the financial year: A G Shelton – Chairman N C Fearis – Non-executive director D J Orth – Executive director and Chief Operating Officer K C Tregonning – Non-executive director K C Tregonning retired from the position of Managing Director and Chief Executive Officer on 28 November 2003, and remained a non-executive director until his resignation from the Board on 5 January 2004. Specified Executives T S Irwin – Chief Financial Officer and Company Secretary (resigned 17 May 2004) R A Pullia – Chief Financial Officer and Company Secretary (appointed 17 May 2004) Remuneration of Specified Directors and Specified Executives The Remuneration and Nominations Committee advises the Board on remuneration policies and practices, evaluates the performance of senior management and makes recommendations to the Board on remuneration for senior managers. Remuneration is in the form of cash remuneration and superannuation contributions. The Board assesses the appropriateness of the nature and amount of remuneration on an annual basis by reference to industry and market conditions, and with regard to the Company’s financial and operational performance. The Company paid no bonuses during the financial year ended 30 June 2004. All specified directors and specified executives have the opportunity to qualify for participation in the Carnarvon Employee Share Plan. The issue of shares under this Plan is at the discretion of the Board. No equity-based remuneration was paid to specified directors or specified executives during the year. The Company has an agreement with a controlled entity of DJ Orth for a term expiring on 31 March 2005, with a three month notice period. The Company has an employment agreement with RA Pullia for an unspecified term with a one month notice period. There are no formal retainer agreements with non-executive directors. Specified Directors A G Shelton N C Fearis D J Orth Dr K C Tregonning Total remuneration Primary Salary & Fees 45,200 34,002 27,000 24,900 160,750 117,096 50,000 200,004 282,950 376,002 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 Post Employment Total Superannuation Termination Benefits 4,800 3,498 3,000 2,415 25,000 24,997 11,557 25,007 44,357 55,917 – – – – – – 80,839 – 80,839 – 50,000 37,500 30,000 27,315 185,750 142,093 142,396 225,011 408,146 431,919 41 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 20. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) Specified Executives R A Pullia T S Irwin Total remuneration Primary Salary & Fees 16,450 – 178,959 – 195,409 206,000 2004 2003 2004 2003 2004 *2003* Post Employment Total Superannuation 1,481 – 9,645 – 11,126 19,263 17,931 – 188,604 – 206,535 225,263 *Total in respect of the financial year ended 2003 does not equal the sum of amounts disclosed for 2003 for individuals specified in 2004, as different individuals were specified in 2003. Equity instrument disclosures relating to directors and executives Shareholdings Specified Directors A G Shelton N C Fearis D J Orth Dr K C Tregonning Total Specified Executives Nil Option holdings Specified Directors A G Shelton N C Fearis D J Orth Dr K C Tregonning Total Balance at 1 July 2003 Remuneration Granted as On exercise Of options Net Change Other Balance at 30 June 2004 (or when resigned) 4,567,421 1,771,400 2,858,067 6,588,067 15,784,955 – – – – – – – – – – 4,641,485 9,208,906 2,100,000 3,871,400 (1,288,940) 1,569,127 (200,000) 6,388,067 5,252,545 21,037,500 Balance at 1 July 2003 Remuneration Granted as Options Exercised Net Change Other Balance at 30 June 2004 (or when resigned) – – 5,000,000 5,000,000 10,000,000 – – – – – – – – – – 1,600,743 1,600,743 300,000 300,000 (4,952,572) 47,428 (5,000,000) – (8,051,829) 1,948,171 Option holdings of specified directors at 30 June 2004 are not related to remuneration and have vested. The options are exercisable and were acquired pursuant to the February 2004 rights issue of ordinary shares. The options are listed on the ASX. 42 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 20. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) Specified Executives Nil All equity transactions with specified directors have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. Other transactions with specified directors Mr AG Shelton is a director of Andrew Shelton & Co Pty Ltd. That company provided financial consulting services to the consolidated entity in relation to various strategic and corporate finance matters concerning the Company and the SW1A Concession in Thailand. The total value of consulting fees paid during the year was $117,000 (2003: $42,000). Of this amount, $42,000 related to services provided in the prior financial year for which invoices were not rendered until after completion of the Company’s capital raisings in November 2003. Furthermore, $66,000 of fees was satisfied by the issue of shares pursuant to the February 2004 rights issue. Mr NC Fearis is a director of Pendomer Investments Pty Ltd. In previous years that company provided services to the consolidated entity in relation to general corporate matters. The total value of fees paid during the year ended 30 June 2004 was nil (2003: $1,200). Dr KC Tregonning is a director of Winlen Pty Ltd. That company provided a Melbourne based fully serviced office to the consolidated entity. The total value of licence fees paid was $nil in 2004 (2003: $79,700). The terms and conditions of the above transactions were no more favourable to the counterparties than those available, or which might reasonably be expected to be available, in respect of similar transactions entered into with non-director related entities on an arm’s length basis. 21. REMUNERATION OF AUDITORS Amounts received or due and receivable by the auditors of Carnarvon Petroleum Ltd and the consolidated entity for an audit and review of the financial report of the Company and any other entity in the consolidated entity. Other services in relation to the entity and any other entity in the consolidated entity. Audit of overseas operations by an overseas office of the auditors of Carnarvon Petroleum Ltd. Other services relate to taxation and other accounting assistance. Consolidated Carnarvon Petroleum Ltd 2004 $ 2003 $ 2004 $ 2003 $ 66,120 41,500 66,120 41,500 39,964 59,150 39,964 59,150 19,694 9,000 – – 125,778 109,650 106,084 100,650 43 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 22. RELATED PARTY DISCLOSURES Ultimate parent Carnarvon Petroleum Limited is the ultimate parent company. Wholly owned group transactions During the reporting period there have been transactions between the Company and its controlled entities. The Company provided accounting and administrative services to its controlled entities for which it did not charge a management fee. The Company also provided interest-free funding for exploration and development expenditure to its controlled entities during the year amounting to $1,635,738 (2003: $1,913,920). The outstanding balance of loans made by Carnarvon Petroleum Ltd to its controlled entities at 30 June 2004 was $4,225,366 (2003: $2,564,474), of which $693,349 (2003: $693,349) has been provided for. These loans are unsecured and have no fixed terms of repayment. 23. FINANCIAL INSTRUMENTS (a) Interest rate risk The consolidated entity’s exposure to interest rate risk is considered minimal and the effective interest rates of financial assets and liabilities at the reporting date are as follows: 2004 Financial assets Cash Receivables Investments – shares Total financial assets Financial Liabilities Trade and other creditors Total financial liabilities 2003 Financial assets Cash Receivables Investments – shares Total financial assets Financial Liabilities Trade and other creditors Cash calls payable Total financial liabilities Floating interest rate $ 527,822 – – 527,822 – – Floating interest rate $ 357,112 – – 357,112 – – – Non-interest bearing $ – 307,456 282,876 590,332 259,322 259,322 Non-interest bearing $ – 298,763 212,697 511,460 309,798 60,000 369,798 Total carrying amount as per the statement of financial position $ Weighted average effective interest rate $ 4.8% 527,822 307,456 282,876 1,118,154 259,322 259,322 Total carrying amount as per the statement of financial position $ Weighted average effective interest rate $ 4.5% 357,112 298,763 212,697 868,572 309,798 60,000 369,798 44 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 23. FINANCIAL INSTRUMENTS (continued) (b) Net fair values All financial assets and financial liabilities have been recognised in the statement of financial position at balance date at their net fair values. The following methods and assumptions are used to determine the net fair values of financial assets and liabilities. Cash and investments: The carrying amount approximates fair value because of their short term to maturity. Receivables and trade and other creditors: The carrying amount approximates fair value. (c) Credit risk exposures The consolidated entity’s maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets, is the carrying amount of those assets as indicated in the statement of financial position. Concentrations of credit risk The consolidated entity considers its exposure to credit risk as minimal. Amounts receivable by the Company relate to either: (i) (ii) costs charged to related entities for which the Company awaits reimbursement; or amounts advanced to employees, which are repayable under the terms of the Carnarvon Employee Share Plan, which requires repayment on sale of the shares. 24. CONTROLLED ENTITIES AND CONTRIBUTION TO CONSOLIDATED ENTITY PROFIT/(LOSS) Name Country of Incorporation % held by parent entity Book value of shares held 2004 2003 2004 $ 2003 $ Carnarvon Petroleum Ltd Controlled entities of Carnarvon Petroleum: Contribution to consolidated entity profit/(loss) 2004 $ 2003 $ (1,290,040) (1,692,372) Lassoc Pty Ltd Australia SLR Exploration Pty Ltd Australia 100 100 100 100 20 10 20 10 – – – – Strategic Exploration (Asia) Limited British Virgin Islands 100 100 1,482,932 1,482,932 (127,004) 184,204 1,482,962 1,482,962 (1,417,044) (1,508,168) 25. EARNINGS PER SHARE Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Weighted average number of ordinary shares on issue used in the calculation of earnings per share (a) (b) (c) (d) 2004 (0.6) (0.6) 2003 (0.9) (0.9) 215,422,141 162,305,169 Earnings used in calculating basic and diluted earnings per share $(1,417,044) $(1,508,169) All potential ordinary shares, being options to acquire ordinary shares are not considered dilutive as the exercise of the options would not decrease the basic loss per share. 45 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S A S A T 3 0 J U N E 2 0 0 4 26. SUBSEQUENT EVENTS During the June 2004 quarter, shareholders of AusAm Resources Limited voted to approve a Scheme of Arrangement whereby shareholders of that company would exchange every five shares held for one share in Northlinks Ltd, a Canadian company listed on the TSX Venture Exchange and subsequently renamed Ausam Energy Corporation (“Ausam Energy”). The issue price of each Ausam Energy share is C$0.75. Existing shareholders of Ausam Energy also approved the Scheme. In August 2004, Ausam Energy announced that it had completed the acquisition of AusAm Resources Limited. Ausam Energy raised C$5.2 million in new capital at a price of C$0.75 and recommenced trading on the TSX Venture Exchange on 15 September 2004. The investment in AusAm Resources Limited is disclosed in Note 7. On 29 September 2004 the consolidated entity announced that it had issued proceedings in Alberta, Canada seeking orders directing Pacific Tiger (Energy) Thailand Limited and Pacific Tiger Energy Inc. to comply with provisions of the Farmin Agreement and Joint Operating Agreement. These two agreements govern relations between the partners in the Wichian Buri SW1A joint venture in Thailand. The Company has taken this action because of its concerns relating to the extent of funding of the joint venture by Pacific Tiger, the failure of Pacific Tiger to remit to Carnarvon its share of joint venture revenue for June and July, and failure to provide financial and operational information. The court has set a date of 24 November 2004 for a hearing of Carnarvon’s claims in relation to the Joint Operating Agreement. 27. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS Carnarvon Petroleum has commenced transitioning its accounting policies and financial reporting from current Australian Standards to Australian equivalents of International Financial Reporting Standards (IFRS). The company has allocated internal resources to perform diagnostic and conduct impact assessments to isolate key areas that will be impacted by the transition to IFRS. As the company has a 30 June year end, priority has been given to considering the preparation of an opening balance sheet as at 1 July 2004 in accordance with AASB equivalents to IFRS. This will form the basis of accounting for Australian equivalents of IFRS in the future, and is required when the company prepares its first fully IFRS compliant financial report for the year ended 30 June 2006. Set out below are the key areas where accounting policies will change and may have an impact on the financial report of the company. At this stage the company has not been able to reliably quantify the impacts on the financial report as a result of the adoption of IFRS. Impairment of Assets Under AASB 136 Impairment of Assets, the recoverable amount of an asset is determined as the higher of fair value less costs to sell and value in use which is required to be determined using a pre-tax discount rate which is assets specific . Additionally, AASB 136 requires entities to look at impairment indicators to determine if assets are required to be impairment tested. This will result in a change in the group’s current accounting policy. Under the new policy it is likely that impairment of assets will be recognised sooner and that the amount of write-downs will be greater. Extractive Industries Standard – Exploration and Development Costs Australian Generally Accepted Accounting Principles (“AGAAP”) currently has a specific accounting standard on extractive industries, which includes the appropriate accounting treatment for exploration and development expenditure. At this stage an equivalent Australian IFRS standard is not expected until late in 2004. Accordingly, it is too early to comment on the differences, if any, between this standard and existing AGAAP. The International Accounting Standards Board (“IASB”) has announced its intention to grandfather national GAAP, such as Australia’s existing area of interest method of accounting for exploration costs, for both producers and explorers, until such time as the IASB produces a comprehensive extractive industry IFRS. However, final detail of the IASB’s proposed grandfathering has not yet been released. As soon as the IASB has incorporated this decision into its Standards the AASB will produce an Australian equivalent so as to allow extractive industry companies to take advantage of the grandfathering in their 2005 transition to IFRS. Income Taxes Under AASB 112 Income Taxes, the company will be required to use a balance sheet liability method which focuses on the tax effects of transactions and other events that affect amounts recognised in either the Statement of Financial Position or a tax-based balance sheet. It is not expected that there will be a material impact as a result of adoption of this standard. Functional Currency Under AASB 121 The Effects of Changes in Foreign Exchange Rates, each entity in the reporting entity is required to determine its functional currency and measure its results and financial position in that currency. Furthermore, the results and financial position of each individual entity included in the reporting entity are to be translated into the currency in which the reporting entity presents its financial statements. This may result in a change in the group’s current accounting policy where a controlled entity currently measures its results and financial position in US$. At this point, the directors have not assessed and determined the functional currencies of each entity in the reporting entity, however, it is not expected that there will be a material impact as a result of adoption of this standard. 46 D I R E C T O R S ’ D E C L A R A T I O N A S A T 3 0 J U N E 2 0 0 4 DIRECTORS’ DECLARATION In accordance with a resolution of the directors of Carnarvon Petroleum Ltd, we state that: In the opinion of the directors: (a) the financial statements and notes of the company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2004 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. On behalf of the Board AG Shelton Director Melbourne, 29 September 2004 47 I N D E P E N D E N T A U D I T R E P O R T T O T H E M E M B E R S O F C A R N A R V O N P E T R O L E U M L I M I T E D INDEPENDENT AUDIT REPORT SCOPE The financial report and directors’ responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors’ declaration for Carnarvon Petroleum Limited (the company) and the consolidated entity, for the year ended 30 June 2004. The consolidated entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Audit approach We conducted an independent audit of the financial report in order to express an opinion on it to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s financial position, and of their performance as represented by the results of their operations and cash flows. We formed our audit opinion on the basis of these procedures, which included: • • examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company. Independence We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence. 48 I N D E P E N D E N T A U D I T R E P O R T T O T H E M E M B E R S O F C A R N A R V O N P E T R O L E U M L I M I T E D INDEPENDENT AUDIT REPORT Audit opinion In our opinion, the financial report of Carnarvon Petroleum Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of Carnarvon Petroleum Limited and the consolidated entity at 30 June 2004 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory financial reporting requirements in Australia. Inherent uncertainty regarding going concern Without qualification to the opinion expressed above, attention is drawn to the following matter. As a result of the matters described in Note 1 of the financial report relating to going concern, there is significant uncertainty whether Carnarvon Petroleum Limited and the consolidated entity will be able to continue as a going concern without obtaining further funds to continue its exploration and development activities and therefore whether it will be able to pay its debts as and when they fall due and realise its assets and extinguish its liabilities in the normal course of business at the amounts stated in the financial report. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the entity not continue as a going concern. Ernst & Young R C Piltz Partner Melbourne 29 September 2004 49 S H A R E H O L D I N G I N F O R M A T I O N SHAREHOLDING INFORMATION Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. The information is current as at 27th September 2004. Distribution of equity securities Size of Holdings 1 – 1,000 1001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000 – and over Total Number of Holders Number of Shareholders Number of Option Holders 1,834 1,307 414 987 456 4,998 331 140 71 102 68 712 The number of shareholders holding less than a marketable parcel was 3,886. Voting rights Votes of shareholders are governed by Rules 32 and 33 of the Company’s Constitution. In broad summary, but without prejudice to the provision of these rules, on a show of hands every shareholder present in person shall have one vote and upon a poll every shareholder present in person or by proxy or attorney shall have one vote for every share held. Twenty largest holders of securities Carnarvon Petroleum’s Top Twenty Shareholders Listed ordinary shares Hamilton Capital Partners Limited Arne Investments Pty Ltd Merrill Lynch (Australia) Nominees Pty Ltd ANZ Nominees Limited Oasis International Trading LLC National Nominees Limited Citicorp Nominees Pty Limited Westpac Custodian Nominees Pty Ltd Pendomer Investments Pty Ltd Jeffrey Frank Fradd Dalkeith Resources Pty Ltd Tregoning Trailers Distributors Pty Ltd Alakor Corporation Inc James Daniel Cooper Blore & Marie Jean Blore John Bernard Porteous William Douglas Goodfellow Doral Mineral Industries Ltd Malcolm Thom Commodity Traders (NZ) Limited John Meek Pty Ltd Total 50 No. of Shares % of Shares 11,168,596 9,208,906 6,289,905 5,967,217 5,333,205 5,095,585 4,203,500 3,977,220 3,600,000 3,190,000 2,741,633 2,700,000 2,487,703 2,440,000 2,233,800 2,171,680 2,049,282 2,000,000 1,954,500 1,850,000 80,662,732 4.10 3.38 2.31 2.19 1.96 1.87 1.54 1.46 1.32 1.17 1.01 0.99 0.91 0.90 0.82 0.80 0.75 0.73 0.72 0.68 29.61 S H A R E H O L D I N G I N F O R M A T I O N Twenty largest holders of securities (continued) Carnarvon Petroleum’s Top Twenty Option Holders Listed options expiring 31/12/05 exercisable at 6 cents Wilabenson Pty Ltd De Min Zhang Gregory Michael Josephson & Mary Margaret Josephson Yue Li Arne Investments Pty Ltd Dalkeith Resources Pty Ltd Julal Pty Limited Goffacan Pty Ltd Catherine Baker Thorpe Road Nominees Pty Ltd Paxevanos Investments Pty Ltd Portfolio Investments International Pty Ltd Jin Xiang Hanpo Bellset Nominees Pty Ltd John Arharidispo Naomi Barbaro Martin Brennan Darlo Pty Ltd Melissa Ann Josephson Lawrence Crowe Consulting Pty Ltd No. of options % of options 2,711,876 2,000,000 1,842,879 1,661,161 1,600,743 1,515,152 1,253,000 1,200,000 1,150,000 1,000,000 750,000 750,000 660,000 600,000 531,543 500,000 500,000 500,000 500,000 500,000 7.23 5.33 4.92 4.43 4.27 4.04 3.34 3.20 3.07 2.67 2.00 2.00 1.76 1.60 1.42 1.33 1.33 1.33 1.33 1.33 Total 21,726,354 57.93 51 I N V E S T O R I N F O R M A T I O N Share Registry Shareholders and option holders with queries relating to their security holdings should contact the Company’s Share Registry in Melbourne: Annual General Meeting The 2004 Annual General Meeting will be held at 10.00am on Tuesday, 30 November 2004 at the Stamford Plaza Melbourne, No. 7 Alfred Place (off Collins Street), Melbourne, Australia. by telephone 1300 850 505 or +61 3 9415 5000 by facsimile +61 3 9473 2500. Alternatively, security holders may prefer to write to: Carnarvon Petroleum Share Registry C/- Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Australia Details of individual security holdings can be checked conveniently and simply by visiting our Registrar’s website at www.computershare.com/au/investors and clicking on the Investor Centre button. For security reasons, you will need to key in your Security Reference Number (SRN) or Holder Identification Number (HIN), your family name and postcode to enable access to personal information. Change of Address Issuer sponsored shareholders should notify the Share Registry immediately, in writing, signed by the shareholder/s, of any change to their registered address. For added security, shareholders should quote their previous address and HIN or SRN. CHESS uncertificated shareholders should advise their sponsoring broker or non-broker participant. Stock Exchange Listing Securities of Carnarvon Petroleum Limited are listed on the Australian Stock Exchange (ASX). ASX Codes: CVN - ordinary shares CVNO - options expiring 31/12/05 exercisable at 6 cents Publications The Company’s full year annual report is the main source of information for investors and is mailed to shareholders in October. Other sources of information are: 1. The Chairman’s address to the Annual General Meeting, which will be available on the Company’s website. 2. The half year financial report reviewing the July to December half year, which will be available on the Company’s website in March. Website Our internet website www.carnarvonpetroleum.com is an important means of keeping investors continuously informed about the Company, including announcements to the ASX. The site also offers investors copies of news releases, financial presentations, half yearly and annual reports to shareholders. Change of Name Shareholders who change their name should notify the Share Registry, in writing, and attach a certified copy of relevant marriage certificate or deed poll, and include their HIN or SRN. Removal from Mailing List Shareholders who do not wish to receive the full year annual report should advise the Share Registry, in writing, and include their HIN or SRN. Lost Holding Statements Shareholders should inform the Share Registry immediately, in writing, so that a replacement statement can be arranged. 52