2009 ANNUAL REPORT CorPorate dIreCtorY Directors PJ Leonhardt (Chairman) EP Jacobson (Chief Executive Officer) NC Fearis (Non-Executive Director) KP Judge (Non-Executive Director) company secretary RA Anderson auDitors WHK Horwath Perth Audit Partnership Bankers Australia and New Zealand Banking Group Limited HSBC (Thailand) registereD office Ground Floor 1322 Hay Street West Perth WA 6005 Telephone: Facsimile: Email: Website: +61 8 9321 2665 +61 8 9321 8867 admin@carnarvonpetroleum.com www.carnarvonpetroleum.com share registry Computershare Investor Services Pty Limited Level 2 45 St Georges Terrace Perth, WA 6000 Australia Investor Enquiries: 1300 557 010 (within Australia) Investor Enquiries: +61 3 9415 4000 (outside Australia) Facsimile: +61 8 9323 2033 stock exchange Listing Securities of Carnarvon Petroleum Limited are listed on ASX Limited ASX Code: CVN - ordinary shares aBn 60 002 688 851 ii Carnarvon Petroleum ltd ContentS chairman’s review chief executive’s review operating anD financiaL review Directors’ report income statements BaLance sheets statements of changes in equity statements of cash fLows notes to the financiaL statements Directors’ DecLaration inDepenDent auDit report corporate governance statement aDDitionaL sharehoLDer information 2 3-4 5-17 18-28 29 30 31-32 33 34-68 69 70-71 72-74 75-76 2009 annual rePort 1 CHaIrman’S revIeW The 2008/09 financial year was a period of severe turbulence in economic conditions and I am delighted to report that Carnarvon has been successful in delivering further significant growth in operational and financial performance. Importantly, we have built a strong foundation for future development and your Company is now very well positioned to pursue the emerging opportunities. Financial and operating highlights include: • • • • Sales revenue grew by 59% to $100.8 million. Due to lower oil prices this did not match the 93% growth in oil sales to 1.35 million bbls Profit after tax increased by 133% to $36.4 million Exploration and development expenditure more than doubled to $35.5 million which was funded from operating cash flows Proved and probable reserves increased by 46% to 16.6 million bbls reflecting the successful exploration and development work programme • Market capitalisation increased by 54% to $556 million at year end and Carnarvon was included in the S&P/ASX 200 Index for the first time These excellent results have been achieved against a background of a collapse in the oil price from record levels, significant fluctuations in the A$ exchange rate, and uncertain market conditions. Over the last two years numerous investment opportunities have been considered by the Board and management team. We have been mindful of the risk-reward balance, particularly during a period of enthusiastic valuations, and have taken a cautious approach to exploration commitments. As a result we believe Carnarvon now has the capacity to pursue the opportunities available at an opportune time in the business cycle. Our existing Phetchabun Basin joint venture interests continue to provide extensive scope for future exploration and development. At the same time, we have grown our regional knowledge and resources and added to our Thai interests. Outside of Thailand our new ventures team is seeing many opportunities, and current work in progress should flow through to the announcement of a number of exciting new interests. At an operational level our Thai Joint Venture partner Pan Orient Energy Corp has again delivered excellent results in the field notwithstanding the complexities and challenges of exploration and drilling in fractured volcanic reservoirs. The contributions of Pan Orient’s Chief Executive Officer, Jeff Chisholm, and his team are greatly appreciated. Our strong working relationship with them is an important element of our success. To continue Carnarvon’s successful growth we are conscious of the need to work closely with all stakeholders including joint venture partners, suppliers, our corporate advisers and shareholders. I would like to thank all those who have supported us during the year. Carnarvon’s people have again made outstanding contributions and the high calibre of our relatively small team is a key to our future growth. On behalf of the Carnarvon Board I congratulate our Chief Executive Officer Ted Jacobson and all of the staff. We all look forward to another exciting year in 2010 and beyond. peter Leonhardt Chairman 2 Carnarvon Petroleum ltd CHIef exeCutIve’S revIeW The Company’s key performance indicators prepared in this report show that the 2008/2009 reporting period has been one of significant growth at all levels. This growth is the direct result of the discovery of oil within highly fractured volcanic reservoirs in the L44/43 licence within onshore Thailand where Carnarvon has a 40% interest. When we look at the production graph it appears that this rapid growth has happened over a period of only two years. But this doesn’t do justice to the extensive preparatory work carried out by the joint venture in Thailand, commencing in late 2005, with the recording of 3D seismic and drilling of eight exploration wells prior to the discovery of commercial oil in fractured volcanics in the POE-9 well. We are fortunate to have a highly competent and experienced operator, Pan Orient Energy Corp, who led our joint venture to this success, demonstrating the importance of performing good technical work and being open minded to new ideas and concepts. Whilst we are grateful for this new discovery, these fractured reservoirs are unlike the homogeneous reservoirs more normally developed for oil production elsewhere and present numerous difficulties. The fracture systems within these volcanic reservoirs are complex with adjacent wells performing quite differently depending on the number, intensity, distribution and size of the fractures intersected. This makes for difficulties in predicting flow rates and ultimate recoveries for wells drilled across the field. During the reporting period 25 wells were drilled with a success of 17 wells resulting in commercial production or extensive testing. This is an excellent result considering the uncertainties posed by these reservoirs. Whilst drilling through these zones the wells often experience “lost circulation” with all drilling fluids being lost into the reservoir with no returns arriving back to the surface. This makes for difficult drilling and at times results in wells taking longer to drill than expected. The L44/43 licence has produced 5.5 mmbbls to date from fractured volcanic reservoirs. Net reserves to Carnarvon estimated by our Reserves Auditor at 31 December 2008 are 16.6 mmbbls. The joint venture has two drilling rigs on long term contract drilling continuously. Whilst it is important to drill many more development wells to grow production, new discoveries such as Bo Rang and L44-W have meant that the drilling programme has had to be changed frequently at short notice to appraise these new discoveries to provide the information required to apply for a development licence. Whilst we have found more commercial oil in these other structures, this has been at the expense of not being able to drill as many production wells as we would have liked. 2009 annual rePort 3 CHIef exeCutIve’S revIeW (Continued) It is becoming clear that the L44/43 licence covers that part of the Phetchabun Basin that is generating considerable quantities of oil, trapped in numerous structures. Although the testing of oil flows at high rates in fractured volcanic reservoirs has led us to drilling these reservoirs exclusively, many other types of prospects occur on the licence and need to be addressed in time, particularly within sandstones deposited within these ancient lake systems such as at the Wichian Buri oil field in the north of the licence. Carnarvon also has a 40% interest in the L33/43 licence immediately to the north. Although we have drilled several unsuccessful exploration wells here, the discovery of a good oil flow rate in the L44-W well on a structure that straddles the border between L44/43 and L33/43 is encouraging that the oil potential may continue to the north into this licence. Several exploration wells will be required to evaluate this trend. The Company is keen to search for other such oily basins not only in onshore Thailand but elsewhere in SE Asia. In 2008, Carnarvon was awarded a 50% interest in permit L20/50 to the west of L44/43. This licence is located within the Phitsanulok Basin south of the largest oil field onshore Thailand at Sirikit. Here Carnarvon, as operator, has commenced the recording and processing of 550 kms of 2D seismic. The preliminary results from this survey are encouraging and the Company plans to drill up to four wells here in early 2010. Furthermore Carnarvon, together with Pearl Energy Ltd, has applications pending with the Thai Government for the granting of two permits south of Bangkok at L52/50 and L53/50 and is evaluating other onshore opportunities in the SE Asian area. Within Australia, Carnarvon has taken a 100% interest in a large permit offshore Western Australia, with a Heads of Agreement signed to exchange 50% of this permit for 50% of three adjacent permits. These permits contain several large structures where two previous drilled wells, Phoenix-1 and 2, intersected several hundred metres of gas within low porosity sandstone reservoirs. The company plans to record 3D seismic over the Phoenix structures late this year. The earliest that appraisal drilling can be undertaken is late in 2010 and Carnarvon will attempt to get a well drilled as soon as possible. This certainly has been a busy year. Aside from all the activity in Thailand, the Company has worked hard to build an asset portfolio that will deliver near and medium term growth, diversified through several countries and in different geological provinces. The new and interesting permit additions I have described are just the beginning. Over the coming months I hope to be able to announce several other interesting opportunities we have been negotiating in other hydrocarbon rich areas, which will provide even more excitement to our drilling programme. With success, all of these opportunities are capable of growing our company substantially. The oil production from our Thailand operations will enable Carnarvon to explore and develop these new opportunities using funds generated from the Company’s cashflow, maintaining our strong financial position without debt. We have been careful in selecting those new opportunities where joint venture partners are like minded to Carnarvon. The Carnarvon management considers good relationships an important ingredient for success. Thus we have been careful to select those opportunities that are situated in areas with well demonstrated hydrocarbon generating systems and where the joint venture is active in carrying out good technical work, encouraging the drilling of wells. Our success in the Pan Orient operated permits in Thailand is testament to this philosophy. None of this could happen without the small and highly loyal team we have at Carnarvon and I sincerely thank the staff and other Board members for their support and hard work. ted Jacobson Chief Executive Officer 4 Carnarvon Petroleum ltd oPeratInG and fInanCIal revIeW company performance Carnarvon tracks several key performance indicators to provide a relative measure of the company’s growth, as shown below. Wells Drilled Period: Measure: Period Change: 1 July 2008 – 30 June 2009 25 wells + 9% 25 20 15 10 5 0 s l l e W 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 Net Sales Period: Measure: Period Change: 1 July 2008 – 30 June 2009 1,353,421 bbls + 93% Financial Year ) s l b b 0 0 0 ’ ( s e l a S l i O t e N 1600 1400 1200 1000 800 600 400 200 0 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 Proved and Probable Reserves Period: Measure: Period Change: As at 31 December 2008 16.6 million bbls + 46% Financial Year 18 16 14 12 10 8 6 4 2 0 ) s l b b M M ( s e v r e s e R P 2 2005 2006 2007 Date 2008 2009 2009 annual rePort 5 oPeratInG and fInanCIal revIeW (Continued) Consolidated Profit After Tax Period: Measure: Period Change: 1 July 2008 – 30 June 2009 A$36.4 million + 133% t l i f o r P d e t a d i l o s n o C ) n o i l l i m $ A ( 45 40 35 30 25 20 15 10 5 0 -5 -10 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 Share Price Period: Measure: Period Change: As at 30 June 2009 A$0.815 + 54% Financial Year 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 ) e r a h s / $ A ( e c i r P Market Capitalisation Period: Measure: Period Change: As at 30 June 2009 A$556 million + 54% 600 500 400 300 200 100 0 ) n o i l l i m / $ A ( p a C t e k r a M 6 Carnarvon Petroleum ltd 2005 2006 2007 Date 2008 2009 2005 2006 2007 Date 2008 2009 oPeratInG and fInanCIal revIeW (Continued) operating review Summary Carnarvon participated in the drilling of 25 wells within the SW1A group of permits resulting in 17 commercial production / testing wells. Successful drilling and testing also resulted in an increase in 2P reserves to 16.6 million bbls. Annual production increased significantly, compensating for varying but decreasing oil prices, resulting in consolidated profit after tax more than doubling from the prior year. In Carnarvon’s operated L20/50 exploration concession, a 500 km 2D seismic acquisition program was initiated. Subsequent to year end Carnarvon was awarded a new permit offshore West Australia in the Roebuck basin on the North West Shelf. A Heads of Agreement has been signed with a third party to swap 50% of Carnarvon’s permit for 50% of three new adjacent permits, subject to ratification by government authorities. Permits Permit Basin Equity Joint Venture Partner(s) Partner Interest Indicative Program Notes Thailand SW1A Phetchabun 40% Pan Orient Energy * 60% L33/43 Phetchabun 40% Pan Orient Energy * 60% L44/43 Phetchabun 40% Pan Orient Energy * 60% L20/50 Phitsanulok 50% Sun Resources 50% Australia WA-435-P Roebuck 100.00% EP321 EP407 Perth Perth 2.50% of 38.25% (i) 2.50% of 42.5% (i) WA399P Carnarvon 50% Rialto Energy 50% Production, Appraisal Appraisal, Exploration Production, Appraisal, Exploration Seismic Acquisition, Exploration Studies Appraisal Appraisal Seismic Acquisition, Exploration Up to two wells planned. Up to two wells planned. Up to 20 wells planned. 500 Km 2D seismic acquisition; One to four wells in planning Reprocessing 315 Km 2D Seismic acquisition. EP110 / EP424 Carnarvon 35% Strike Oil * Pancontinental Oil and Gas 25% 30% Exploration Active farm out. Note: (*) Denotes operator where Carnarvon is non-operator partner (i) Carnarvon has an overriding royalty interest in these assets 2009 annual rePort 7 oPeratInG and fInanCIal revIeW (Continued) Thailand Carnarvon’s principal assets are the producing fields in the L44/43 and SW1A licences in the Phetchabun Basin onshore Thailand. L44/43, SW1A & L33/43 Thailand Phetchabun Basin (“SW1A”) (Carnarvon Petroleum 40%, Pan Orient 60% operator) A total of 25 wells were drilled in the SW1A permits resulting in 17 commercial oil production / testing wells, delineation of one new oil field, and several new oil pools. The remaining eight wells all contained promising oil shows and several have sidetrack potential. A production license and environmental approval were granted over the Na Sanun East (“NSE”) oil field allowing field development drilling to commence. volumes commercial in the northern Exploration drilling failed to exploration block L33/43 intersect of hydrocarbons. However, the L44-W oil discovery, in the north eastern corner of L44/43, is interpreted to spill over into the southern end of L33/43. Appraisal drilling of the L44-W oil discovery is anticipated in both concessions over the next 12 months. Permit map of Thailand 8 Carnarvon Petroleum ltd oPeratInG and fInanCIal revIeW (Continued) A total of sixteen development/appraisal wells have been drilled into the NSE structure, with several other oil pools discovered above and below the main producing volcanic reservoir. It is evident from the varied drilling results that the development of oil reserves from the fractured volcanic reservoirs at Na Sanun East and adjacent oil fields requires comprehensive understanding due to the severe heterogeneity in this type of reservoir. these The geological setting of volcanic oil reservoirs is very complex, featuring rapid changes of lithofacies and thicknesses, distributions of fractures and pores/vugs, and different oil well productivities with neighbouring wells. likely exploitation plan The most for NSE incorporates 20 to 25 development wells being drilled from mid 2008 through to mid 2010. The wells will be drilled from a total of 7 to 10 well cluster locations, with each location being designed and built to accommodate a maximum of four wells. Each location will have oil treatment, storage and offloading capacity. The production profile is designed for plateau production of 15,000 bopd for 1-2 years before natural decline. There is sufficient capacity in the existing trucking operation infrastructure to cater for delivery of the oil from the field to the refinery in Bangkok. Location of oilfields and prospects within L44/43 & L33/43 Thailand Phetchabun Basin While a significant number of wells have been drilled, and a comprehensive 3D geological model has been completed, a comprehensive development plan is still in the course of development by the joint venture. 2009 annual rePort 9 oPeratInG and fInanCIal revIeW (Continued) L20/50 Thailand Phitsanulok Basin (Carnarvon Petroleum 50% Operator, Sun Resources 50%) Carnarvon, and partner Sun Resources, were granted the L20/50 exploration concession in January of 2007. The L20/50 concession is situated approximately 30 kms to the southeast and on trend with the largest onshore oil field in Thailand at Sirikit. The permit is around 60 km to the west of Carnarvon’s 40% owned Petchabun Basin producing assets. The concession covers around 4,000 km2 and is lightly explored. Around 1,000 km of 1980’s vintage 2D seismic data is available in paper format and six wells have been drilled in the block (three shallow at around 500m and three deeper). One previously drilled well in 1982 at Nong Bua-1 intersected oil shows which Carnarvon believes were not fully tested. Carnarvon is continuing to investigate the possibility of twinning or re-drilling this well. Carnarvon has also digitized and reprocessed the bulk of the available 2D seismic data and the interpretation of that dataset showed the potential for a large number of structures of significant potential size. 500 km of new 2D seismic is being acquired and is due for completion in September of 2009. Reprocessed 1980’s vintage 2D seismic line indicates potential structuring The processing and interpretation of the new data, incorporating the reprocessed data, will be fast tracked to allow for a decision on the location and number of exploration wells to be drilled in 2010. Geological analysis of seismic and previous drilling data has concluded that a number of play types are apparent, including Sirikit style fans, Wichian Buri style sandstones, and Na Sanun style volcanics. 10 Carnarvon Petroleum ltd oPeratInG and fInanCIal revIeW (Continued) L52/50 and L53/50 Thailand Surat-Khiensa Basin (Carnarvon Petroleum 50%, Pearl Oil 50% operator) The Company has applied to the Department of Mineral Fuels (“DMF”) in Thailand for concession rights in petroleum exploration and production for two areas described as Blocks L52/50 and L53/50 (“the Concessions”) onshore Thailand within the Surat-Khiensa Basin. Pearl Oil (Petroleum) Ltd (“Pearl”), an independent oil and gas company with exploration and production (E&P) activities focused exclusively in South East Asia, submitted the bid as operator on behalf of Pearl and Carnarvon, each company participating at a 50% equity level. The combined area of the two blocks is large, comprising approximately 6,950 km2, however both are lightly explored with only two deep wells and limited seismic data available. There has been minimal exploration over the area and little public knowledge is available about the Surat-Khiensa Basin, however work completed to date and Carnarvon’s regional knowledge suggests this is an area with good potential for hydrocarbon exploration. Carnarvon and Pearl were together the sole bidders for this block and the Company anticipates award in late 2009. Australia WA-435-P Australia Offshore Northwest Shelf (Carnarvon Petroleum 100% Operator) Basin locations within Application Permits L52/50 and L53/50 Subsequent to being awarded 100% of exploration permit WA-435-P, Carnarvon entered into a heads of agreement with private exploration company Finder Exploration (“Finder”) to swap 50% of Carnarvon’s WA-435-P for 50% of the three new adjacent Finder permits WA-436-P, WA-437-P and WA-438-P, subject to ratification by the government authorities. Finder will assume operatorship of all four permits. The four permits are situated in the north-western part of the Bedout Sub-basin within the greater Roebuck Basin, offshore Western Australia. The blocks lie in an under-explored area that has received little recent attention, between the prolific Carnarvon Basin hydrocarbon province to the southwest and the Browse Basin to the northeast. The town of Port Hedland lies approximately 150 km to the south of the permits and Broome lies 250 km to the northeast. Water depths range from 35 to 265 metres and the permits cover a very large area of more than 21,000 km2 (268 graticular blocks). 2009 annual rePort 11 oPeratInG and fInanCIal revIeW (Continued) Only six wells have been drilled in the permits to date. The two wells, Phoenix-1 and Phoenix-2, drilled on the large Phoenix structure in WA-435-P both intersected extensive gas columns within lower- porosity, mid-Triassic reservoirs. In particular, Phoenix-1 recorded 110 metres of net gas-bearing section; however, further work is required to determine whether the gas discovery at Phoenix could flow at commercial rates. A larger, untested structure in WA-435-P lies directly on trend with the Phoenix structure, 5 to15 km to the southwest. Further to the southeast in WA-437-P lies yet another large, untested structure. Regional geology suggests that reservoir quality improves southward toward these prospects, but this model will need to be confirmed by drilling. These Triassic structures have significant potential of the order of several Tcf’s of recoverable gas, if exploration and appraisal drilling are successful. Other viable plays are recognised in these blocks including possible oil exploration potential at the shallower Cretaceous-aged levels. Carnarvon and Finder intend to carry out numerous studies to evaluate this potential. The Government approved work programme for these permits, for the initial firm three-year term, comprises seismic reprocessing, the recording of an aeromagnetic survey and technical studies, which will include a complete analysis of the gas intersections in the Phoenix-1 and Phoenix-2 wells. The second three-year term is planned to consist of seismic acquisition and the drilling of at least one well in each permit. The results of the initial technical studies will be used to modify/accelerate this second period work programme as appropriate. Carnarvon’s proposed new permits, offshore Western Australia. 12 Carnarvon Petroleum ltd oPeratInG and fInanCIal revIeW (Continued) WA-399 P – Australia Offshore Northwest Shelf (Carnarvon Petroleum 50% Operator, Rialto Energy 50%) WA-399-P was awarded on 7 May 2007. The permit covers an area of 50km2 located between the Pyrenees and Macedon oil and gas fields and the Leatherback oil accumulation. Carnarvon has completed the reprocessing of all available seismic over the permit (550 km2). The current work programme requires acquisition of 315km of new 2D seismic and Carnarvon is reviewing vessel availability and prices. EP 424 / EP 110 - Australia Offshore Northwest Shelf (Carnarvon Petroleum 35%, Strike Oil 40% operator, Pancontinental 25%) A variation to the permit terms of EP 424 has been granted from the Department of Industry and Resources to alter the requirement for the drilling of one well by 13 April 2011. Further detailed seismic analysis of ‘amplitude versus offset’ was carried out by the operator over the Baniyas Prospect to refine the nature of hydrocarbons expected. The Baniyas Prospect is situated on the downthrown side of the Flinders Fault and bright seismic amplitudes on the crest are similar to the Cyrano and Nasutus discoveries elsewhere along trend which encountered a gas cap on an oil leg. Baniyas is estimated to have potential for Pmean prospective resources of 26 million barrels oil and 56 Bcf gas (34 million Barrels of Oil Equivalent). These prospective resources are of a speculative nature until the prospect has been evaluated by drilling. The joint venture is actively farming out the drilling of a well into this prospect. North West Shelf permits – location map 2009 annual rePort 13 oPeratInG and fInanCIal revIeW (Continued) reserve assesment Petroleum Resource Classification, Categorisation and Definitions Carnarvon calculates reserves and resources according to the SPE/WPC/AAPG/SPEE 1 Petroleum Resource Management System (“SPE- PRMS”) definition of petroleum resources. This definition was first published in 1997 by the SPE, and in an effort to standardise reserves reporting, has been further clarified by the SPE-PRMS in 2007. Carnarvon reports reserves in line with ASX Listing Rules. PRODUCTION RESERVES Proved Proved & Probable Proved, Probable & Possible Commercial CONTINGENT RESOURCES Discovered, but not currently commercial PROSPECTIVE RESOURCES Exploration prospectivity Proved and Probable (2P) Reserves Thailand Carnarvon’s reserves base has been certified by an independent reserves auditor. Over the last few years Gaffney, Cline and Associates (“GCA”), one of the largest independent reserves certifiers in the world, has performed this service in line with end of calendar year requirements for the Department of Mineral Fuels (“DMF”) in Thailand. GCA certified 16.6 million barrels of oil of 2P oil reserves net to Carnarvon as at 31 December 2008, which is an increase of 46% percent compared to 31 December 2007 reserves. Net Carnarvon Reserves Proved 1P Proved + Probable 2P Proved + Probable + Possible 3P GCA 31 Dec 2008 3.72 (million bbls) 16.62 (million bbls) 36.85 (million bbls) This report is based on information which has been compiled by the Company’s Chief Operating Officer, Mr Philip Huizenga, who is a full-time employee of the Company. Mr Huizenga is qualified in accordance with ASX Listing Rule 5.11 and has consented to the form and context in which this statement appears. 1 Society of Petroleum Engineers ( SPE ); World Petroleum Council ( WPC ); American Association of Petroleum Geologist ( AAPG ) & Society of Petroleum Evaluation Engineers ( SPEE ) 14 Carnarvon Petroleum ltd oPeratInG and fInanCIal revIeW (Continued) Contingent Resources Thailand In addition to its certified reserves, Carnarvon has a number of discovered oil and gas resources which currently do not classify as reserves. Net Carnarvon Contingent Resource 2C (million bbls) 2.5 5.0 2.2 3.7 9.7 3.6 5.8 2.6 35.1 NSE - F1 NSE North A NSE - I1 Bo Rang A Bo Rang B L44-W Si Thep (Deep) L44-R Carnarvon 30 June 2009 Carnarvon has an estimated 35 million barrels of contingent oil resources. These resources are not reserves, because further work is required to mature them, most notably appraisal drilling and well testing. During 2008 around 2.5 million bbls of contingent resources were matured into 2P reserves. Contingent resources have been replenished by the recent L44-W, NSE-I1 and NSE-F1 oil discoveries. Map showing location of contingent resources 2009 annual rePort 15 oPeratInG and fInanCIal revIeW (Continued) Prospective Resources Under the SPE-PRMS definitions prospective resources can also be classified as exploration resources. Carnarvon has a growing number of exploration licences. These exploration licences are evaluated using techniques like gravity and magnetic surveys, geochemical surveys, seismic surveys and basin analysis. This analysis results in a long list of leads and drillable prospects. Only drillable prospects, which have been included on drilling schedules, are categorised as prospective resources by Carnarvon. Leads are identified as potential hydrocarbon accumulations that will require additional study before they are matured to prospects and appear in drilling plans. It is important to realise that prospects and leads carry exploration risks, which result in a chance of not finding commercial hydrocarbons. These risks are identified by Carnarvon and help management in ranking exploration activities. At the time of writing this report, Carnarvon has a seriatim of leads in a number of exploration blocks, most notably L20/50, L33/43 and L44/43 in Thailand, but is still in the process of undertaking additional work to progress those leads to drillable prospects. Notwithstanding, a number of exploration wells are scheduled for the latter part of 2009 and for 2010. growth anD new ventures Carnarvon has continued to achieve significant growth from its successful exploration and development efforts in its Thailand assets, L44/43 and SW1A. These areas continue to be a primary focus for the Company and they are now delivering significant sustained oil production and revenues. Cash flow from these producing fields facilitates Carnarvon’s pursuit of other new venture opportunities to grow the company. Through the year Carnarvon has added four new exploration permits offshore North West Shelf Australia and is actively pursuing several other near term drilling opportunities. The new ventures team has implemented a strategy to acquire quality exploration acreage and appraisal projects with preference for the following: • • • • • low cost, non-operated interests with competent partner operators on trend with commercial oil discoveries necessary infrastructure and markets in place leveraging Carnarvon’s knowledge and expertise to develop healthy, long-term relationships with larger operators organic growth as well as growth via mergers and acquisitions Carnarvon is at an advanced stage of progressing several additional exploration and appraisal opportunities to deliver on this strategy over the next few months. 16 Carnarvon Petroleum ltd oPeratInG and fInanCIal revIeW (Continued) financiaL summary The Group’s revenue from continuing operations for the year ended 30 June 2009, being its share of the Phetchabun Basin Joint Venture (“Joint Venture”) in Thailand, was $100,758,000 (2008: $63,033,000). The higher A$ oil revenue resulted from Carnarvon’s share of higher Joint Venture oil sales of 1,353,421 bbls (2008: 702,084 bbls), however this was offset by a reduced oil sale price of US$56.92 per bbl (2008: US$82.19). The weakening in the A$/US$ exchange rate from US$0.96 to US$0.80 over the reporting period also had a positive impact on A$ revenue. The Group’s profit after income tax for the year ended 30 June 2009 was $36,423,000 (2008: $15,651,000 profit). Its share of the pre tax (income and special remuneratory benefit) cash operating profit of the Joint Venture increased to $83,194,000 (2008: $52,734,000) as a result of improved production and the low variable operating, transportation, royalty and selling cost of per barrel of $12.95 (2008: $13.87). Depreciation cost per barrel increased to $7.43 (2008: $3.78); estimated future costs of maintaining existing production have been included, effective 1 July 2008, in the depreciable cost base. New venture costs of $963,000 (2008: $973,000) are indicative of the Company’s continued effort to diversify its project base. Corporate and administration costs for the year of $2,909,000 (2008: $2,129,000), excluding share-based payments, reflect a general increase in corporate costs, including larger office premises, together with staff costs devoted towards expanding the Company’s technical capability. 2009 annual rePort 17 dIreCtorS’ rePort The directors present their report together with the financial report of Carnarvon Petroleum Limited (“Company”) and of the Group, being the Company, its controlled entities, and the Group’s interest in jointly controlled assets, for the financial year ended 30 June 2009, and the auditor’s report thereon. Carnarvon Petroleum Limited is a listed public company incorporated and domiciled in Australia. Directors The names and details of the Company’s directors in office at any time during or since the end of the financial year are as follows. Directors were in office for this entire period unless otherwise stated. Peter J Leonhardt Chairman FCA, FAICD (Life) Appointed as a director on 17 March 2005 and appointed Chairman in April 2005. Mr Leonhardt is an independent company director and adviser with extensive business, financial and corporate experience. He is a Chartered Accountant and a former Senior Partner with PricewaterhouseCoopers and Managing Partner of Coopers & Lybrand in Western Australia. During the past three years Mr Leonhardt has served as a director of the following listed companies: CTI Logistics Limited (from August 1999); Centrepoint Alliance Limited (from May 2002 to June 2009). He is also a director of the Western Australian Institute for Medical Research. Mr Leonhardt is a member of the Audit Committee and the Remuneration Committee. Edward (Ted) P Jacobson Chief Executive Officer B.Sc (Hons Geology) Appointed as a director on 5 December 2005. Mr Jacobson is a petroleum geophysicist with 38 years’ experience in petroleum exploration principally in the European North Sea, South East Asia, South America and Australia. Within Australia he has been responsible for initiating a number of petroleum discoveries within the Cooper Basin, Barrow Sub Basin and Timor Sea. In 1986, Ted established the consulting company Exploration Study Projects Pty Ltd which advised companies on new venture opportunities in Australia and South East Asia and assisted in capital raisings and corporate activity. In 1991 Ted was co-founder of Discovery Petroleum NL and from 1996 co-founder and technical director of Tap Oil Ltd which grew to a market capitalisation of over $400 million under his technical leadership. Ted retired from Tap in September 2005. During the past three years Mr Jacobson has served as director of the following listed companies: Rialto Energy Limited (from July 2006). Mr Jacobson was also a director of Smart Rich Energy Finance (Holdings) Ltd (from January 2007 to November 2007), listed on the Hong Kong Stock Exchange. Neil C Fearis Non-Executive Director LL.B (Hons), MAICD, F Fin Appointed as a director on 30 November 1999. Mr Fearis has over 32 years’ experience as a commercial lawyer in the UK and Australia. During the past three years Mr Fearis has served as a director of the following listed companies: Kresta Holdings Limited (from 1997); Perseus Mining Limited (from 2004); Liberty Resources Limited (from June 2007 to November 2008). Mr Fearis is also a member of several professional bodies associated with commerce and law. Mr Fearis is Chairman of the Audit Committee and Chairman of the Remuneration Committee. 18 Carnarvon Petroleum ltd dIreCtorS’ rePort (Continued) Directors (continueD) Kenneth P Judge Non-Executive Director B.Com, B. Juris, LL.B Appointed as a director on 1 April 2005. Mr. Judge has extensive legal and business management experience having held a number of public company directorships and has been engaged in the establishment or corporate restructure of technology, mining, and oil and gas companies in Australia, United Kingdom, USA, Brazil, Argentina, Mexico and the Philippines. Mr. Judge is a director and Chairman of Brazilian Diamonds Limited (from February 2001), which is listed on both the Toronto Stock Exchange and the AIM market of the London Stock Exchange Plc. He is also Chairman of Hidefield Gold Plc (from October 2003) and a director of Gulfsands Petroleum Plc. (from October 2006), both of which are listed on AIM. He is also a director and Chairman of Alto Ventures Ltd (from April 2004) which is listed on the TSX Venture Exchange. Mr Judge is a member of the Audit Committee and the Remuneration Committee. company secretary Mr Robert Anderson was appointed Company Secretary in November 2005. Mr Anderson is a Chartered Accountant who has previously held company secretarial positions in both ASX-listed companies and private entities. Directors’ meetings The number of directors’ meetings held and attended by each of the directors during the reporting period was as follows: Peter Leonhardt Ted Jacobson Neil Fearis Ken Judge (a) Number of meetings held during period of office (b) Number of meetings attended auDit committee Names and qualifications of Audit Committee members (a) 6 6 6 6 (b) 6 6 6 6 The Committee is to include at least 3 members from 1 July 2009. Current members of the committee are Neil Fearis (Chairman), Peter Leonhardt, and Ken Judge. Mr Judge was appointed a member on 1 July 2009. Qualifications of Audit Committee members are provided in the Directors section of this directors’ report. Audit Committee meetings The number of Audit Committee meetings held and attended by the members during the reporting period was as follows: Peter Leonhardt Neil Fearis (a) Number of meetings held during period of office (b) Number of meetings attended (a) 3 3 (b) 3 3 2009 annual rePort 19 dIreCtorS’ rePort (Continued) remuneration committee In August 2008 the Board determined the Company was of a size to justify the existence of a Remuneration Committee that now comprises Neil Fearis (Chairman), Peter Leonhardt, and Ken Judge. Remuneration Committee meetings The number of Remuneration Committee meetings and the number attended by each of the members during the reporting period were as follows: Peter Leonhardt Neil Fearis Ken Judge (a) Number of meetings held during period of office (b) Number of meetings attended (a) 2 2 2 (b) 2 2 2 The Remuneration Committee is responsible for the remuneration arrangements for directors and executives of the Company. The Remuneration Committee considers remuneration packages and policies applicable to the executive directors, senior executives, and non-executive directors. It is also responsible for share option schemes, the Employee Share Plan, incentive performance packages, and retirement and termination entitlements. remuneration report Until August 2008 the Board determined remuneration policies and practices, evaluated the performance of senior management, and considered remuneration for those senior managers. The Remuneration Committee now 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. 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. The value of remuneration is determined on the basis of cost to the Company and the Group. Principles of compensation Remuneration of directors and executives is referred to as compensation throughout this report. Compensation levels for key management personnel of the Company and the Group are competitively set to attract and retain appropriately qualified and experienced directors and senior executives. The directors obtain, when required, independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally. Compensation arrangements recognise the relatively small size of the staff and stage of development of the Company and include a mix of fixed and performance based compensation. A component of share-based compensation may be awarded at the discretion of the Board, subject to shareholder approval when required. Compensation structures take into account the overall level of compensation for each director and executive, the capability and experience of the directors and senior executives, the executive’s ability to control the financial performance of the relative business segment, the Group’s performance (including earnings and the growth in share price), and the amount of any incentives within each executive’s remuneration. On 1 August 2008 the Board adopted a policy that prohibits those that are issued share-based payments as part of their remuneration from entering into other arrangements that limit their exposure to losses that would result from share price decreases. The Company requires all executives and directors to sign annual statements of compliance with this policy throughout the preceding year. 20 Carnarvon Petroleum ltd dIreCtorS’ rePort (Continued) remuneration report (continueD) Principles of compensation (continued) In considering the Group’s performance and benefits for shareholder wealth, the Board has had regard to the following indices in respect of the current financial year and the previous four years. No dividends have been paid or declared during this period. 30 June 2005 30 June 2006 30 June 2007 30 June 2008 30 June 2009 Share price $0.018 $0.052 $0.24 $0.53 $0.815 Consolidated net profit / (loss) from continuing operations ($000) ($1,007) ($1,246) ($1,542) $15,651 $36,423 The directors believe the increase in share price since June 2005 reflects a number of factors, including the appointment of Ted Jacobson as Chief Executive Officer in February 2006. The development of the Group’s oil and gas interests in Thailand since his appointment has resulted in a substantial increase in production and operational revenues, as evidenced by the operating profit in the current and prior reporting period. Fixed compensation Fixed compensation consists of base compensation as well as employer contributions to superannuation funds. Base compensation may be supplemented by an element of share-based compensation. There was no share-based compensation in the current or prior reporting periods, other than that set out in the Employee Share Plan section of this remuneration report. Non-executive directors Total remuneration for all non-executive directors, last voted upon by shareholders at a General Meeting in November 2008, is not to exceed $300,000 per annum. A non-executive director’s base fee is currently $60,500 per annum. The Chairman receives $103,500 per annum. Non-executive directors do not receive any performance-related remuneration. Directors’ fees cover all main Board activities and membership of Board committees. The Company does not have any terms or schemes relating to retirement benefits for non-executive directors. Service contracts The contract duration, period of notice and termination conditions for key management personnel are as follows: (i) Ted Jacobson, Chief Executive Officer, is engaged through a rolling 12 month Employment Agreement. Termination by the Company is with 3 months’ notice (or payment in lieu thereof) and payment of 9 months remuneration. Termination by Mr Jacobson is with 3 months’ notice. (ii) Robert Anderson, Company Secretary and Chief Financial Officer, is engaged through a rolling 12 month Consultancy Agreement. Termination by the Company is with 6 months’ notice or payment in lieu thereof. Termination by the consultant is with 3 months’ notice. (iii) Philip Huizenga, Chief Operating Officer, is engaged as an employee. Termination by the Company is with 4 weeks’ notice or payment in lieu thereof. Termination by Mr Huizenga is with 4 weeks’ notice. 2009 annual rePort 21 dIreCtorS’ rePort (Continued) remuneration report (continueD) Employee Share Plan Shares are issued under an Employee Share Plan (“ESP”), which has been approved by shareholders in Annual General Meeting (“AGM”). The purpose of the ESP is to attract, retain and motivate those who have been invited to participate in the ESP and thereby align their interests with those of other shareholders as a means of encouraging them to ensure that Company performance increases shareholder wealth through long term growth. Shares are issued based upon the assessed performance of each person against their job specifications and the recommendations of the Chief Executive Officer, and in the case of directors, with the approval of shareholders. There were no ESP shares issued to directors and key management personnel during the reporting period. 2008 executive officers RA Anderson PP Huizenga number of shares issued 100,000 100,000 issue date 07/01/2008 07/01/2008 issue price per share $0.701 $0.701 Loan $70,100 $70,100 These issues were not subject to a performance condition but were made having regard to market advice on the relevant base packages. The issue price was calculated based on the 5 day weighted average closing price prior to the date of offer. The purchases were funded by interest-free loans with a limited recourse security over the plan shares and subject to the detailed rules of the ESP. Analysis of bonuses included in remuneration All cash bonuses awarded during the period and included in remuneration, as set out on page 23, fully vested to each of the directors, named Company executives, and key management personnel during the period. Directors’ and executive officers’ remuneration (Company and consolidated) Details of the nature and amount of each major element of the remuneration of each director of the Company and each of the named Company and Group executives receiving the highest remuneration are set out on the following page. The fair value of options, including ESP shares treated in principle as an option over the Company’s shares, is calculated at the date of grant using the Black-Scholes Option Pricing Model. Shares issued under the ESP vest immediately and their fair value is recognised as an expense in the current period. The following factors and assumptions were used in determining the fair value of ESP shares at grant date in the current and prior reporting period: 2008 grant date assumed expiry date fair value per option exercise price price of shares at grant date expected volatility risk free interest rate Dividend yield 07/01/2008 06/01/2011 $0.31 $0.701 $0.701 55% 7.5% 0% 22 Carnarvon Petroleum ltd dIreCtorS’ rePort (Continued) f o e u l a v s n o i t p o f o % a s a f o n o i t r o p o r p n o i t a r e n u m e r e c n a m r o f r e p n o i t a u n n a r e p u s h s a c m r e t t r o h s n o i t a r e n u m e r % d e t a l e r ) $ ( l a t o t ) $ ( s n o i t p o ) $ ( s e r a h s ) $ ( s n o i t u b i r t n o c ) $ ( s u n o b ) $ ( s e e f d n a y r a l a s ) n a m r i a h C ( t d r a h n o e L J P r M s r o t c e r D i e v i t u c e x E - n o N e m a N s t n e m y a p d e s a b - e r a h s l t n e m y o p m e t s o p m r e t t r o h s ) d e u n i t n o c ( d e t a d i l o s n o c d n a y n a p m o C , n o i t a r e n u m e r ’ s r e c fi f o e v i t u c e x e d n a ’ s r o t c e r i D ) D e u n i t n o c ( t r o p e r n o i t a r e n u m e r - - - - - - - - - % 9 0 1 . - % 0 7. 1 - - - - - - % 5 8 . % 3 3 1 . % 7 8 . % 3 9 . - % 7 8 . 0 5 7 6 9 $ , 0 0 5 2 8 $ , 0 5 7 7, 5 $ 0 0 0 0 5 $ , 0 5 7 7, 5 $ 0 0 0 0 5 $ , , 9 4 2 1 1 4 $ , 0 0 0 5 7 3 $ , 0 5 7 8 5 2 $ , 8 4 9 1 8 2 $ - - - - - - - - - 4 3 7 0 3 $ , , 1 6 9 3 4 3 $ , 2 8 2 0 8 1 $ - 4 3 7 0 3 $ , , 0 1 2 6 2 2 1 $ , , 0 3 7 9 1 0 1 $ , - 8 6 4 1 6 $ , - - - - - - - - - - - - - - - - - - - - - - - - - - 0 5 7 6 9 $ , 0 0 5 2 8 $ , 0 5 7 7, 5 $ 0 0 0 0 5 $ , 0 5 7 7, 5 $ 0 0 0 0 5 $ , 6 6 0 1 3 $ , 3 3 6 9 $ , 0 0 0 5 3 $ , , 0 0 0 0 5 $ 3 8 ,1 5 4 3 $ , 7 6 3 5 1 3 $ s i r a e F C N r M 9 0 0 2 8 0 0 2 e v i t u c e x e n o s b o c a J P E r M e g d u J P K r M 9 0 0 2 8 0 0 2 9 0 0 2 8 0 0 2 ) r e c fi f O e v i t u c e x E f e h C i ( 9 0 0 2 8 0 0 2 ) y r a t e r c e S y n a p m o C / O F C ( n o s r e d n A A R r M - - 0 0 5 2 2 $ , , 4 1 2 6 2 $ , 0 5 2 6 3 2 $ , 0 0 0 5 2 2 $ 9 0 0 2 8 0 0 2 1 3 9 7, 3 $ 8 4 3 2 1 $ , - , 0 1 9 9 2 $ , 7 9 9 8 6 $ 1 8 9 1 2 $ , 0 1 4 7, 8 $ , 4 1 2 6 7 $ l . y t i t n e d e t a e r - r o t c e r i d a r o r o t c e r i d e h t o t l e b a y a p r o d a p e r a i , 7 6 0 0 6 8 $ , 3 0 8 9 6 0 1 $ , 0 2 ,1 6 7 2 $ ) r e c fi f O g n i t a r e p O i f e h C ( a g n e z i u H p i l i h P r M 9 0 0 2 0 0 2 7, 3 1 $ ) 8 0 0 2 y r a u n a J 1 m o r f ( 8 0 0 2 ) d e t a d i l o s n o c d n a y n a p m o C ( y e k : n o i t a s n e p m o c l a t o T l e n n o s r e p t n e m e g a n a m s e e f ’ s r o t c e r i D 9 0 0 2 8 0 0 2 2009 annual rePort 23 dIreCtorS’ rePort (Continued) remuneration report (continueD) Equity instruments (i) Shares There were no shares in the Company issued as compensation to key management personnel during the reporting period, other than the ESP shares treated in principle as an option over the Company’s shares as described under (ii) below. (ii) Options and ESP shares There were no options over shares or ESP shares in the Company issued as compensation to key management personnel during the reporting period. No options have been issued since the end of the financial year. Share issues under the Company’s ESP are treated in principle as an option over the Company’s shares and are included in the option tables below. These options are assumed to have a life of 3 years. Details of options, including ESP shares treated in principle as options, issued and vested to directors and executives are as follows. All options were issued for nil cash consideration, vest immediately, and have been recognised as an expense in the current period. 2008 executive officers RA Anderson PP Huizenga number of esp shares issued issue date fair value per option at issue date 100,000 100,000 07/01/2008 07/01/2008 $0.31 $0.31 exercise price per option $0.701 $0.701 assumed expiry date 06/01/2011 06/01/2011 The following shares were issued on the exercise of options issued as compensation in prior periods. These options were issued to Directors in 2006 at a time the Company had no full-time employees, very limited cash resources, and recognised the unusual contribution of the Directors. 2009 Directors EP Jacobson PJ Leonhardt NC Fearis KP Judge 2008 Directors EP Jacobson PJ Leonhardt KP Judge KP Judge number of shares amount paid per share 4,000,000 3,000,000 2,000,000 1,000,000 $0.10 $0.10 $0.10 $0.10 number of shares amount paid per share 4,000,000 3,000,000 2,000,000 1,000,000 $0.07 $0.07 $0.07 $0.10 There are no amounts unpaid on shares issued as a result of the exercise of options. During the reporting period there was no forfeiture or vesting of options issued in previous periods. At the end of the reporting period there were no unvested options on issue. All options expire on the expiry date but do not expire as a result of the termination of the holder’s engagement with the Company. 24 Carnarvon Petroleum ltd dIreCtorS’ rePort (Continued) remuneration report (continueD) Equity instruments (continued) (ii) Options and ESP shares (continued) The movement during the reporting period, by value, of options over ordinary shares, including shares issued under the Company’s ESP, for each company director and company executive and issued as part of remuneration is detailed below. These should be read in the context of the comments above about the status of the Company in 2006 at the time the options were issued. Directors EP Jacobson PJ Leonhardt KP Judge NC Fearis executive officers PP Huizenga issued in year ($) exercised in year ($) forfeited in year ($) total value in year ($) value of options - - - - 1,160,000 870,000 290,000 580,000 - - - - 1,160,000 870,000 290,000 580,000 value of options issued in year ($) exercised in year ($) forfeited in year ($) total value in year ($) - 359,000 - 359,000 The value of options issued in the year is the fair value of the options at grant date using the Black-Scholes Option Pricing Model. The value of options exercised during the year is calculated as the market price of shares of the Company on ASX Limited as at close of trading on the date the options were exercised or the ESP loan repaid, after deducting the price paid to exercise the options or repay the loan. non-auDit services The auditors have not performed any non-audit services over and above their statutory duties during the current reporting period. Details of the amounts paid or payable to the auditor of the Group for audit services provided during the year are set out below: audit services Auditors of the Company: Audit and review of financial reports Directors’ interests consolidated 2009 ($) 108,000 At the date of this report, the relevant interests of the directors in securities of the Company are as follows: name PJ Leonhardt EP Jacobson NC Fearis KP Judge ordinary shares options over ordinary shares 17,000,000 30,917,335 8,400,000 10,932,855 - - - - Shares issued under the Company’s ESP are included under the heading Ordinary Shares. 2009 annual rePort 25 dIreCtorS’ rePort (Continued) share options Options issued to directors and executives of the Company There were no options over shares or ESP shares in the Company issued as compensation to directors or named executives during or since the end of the financial year. Shares under option The following unissued ordinary shares of the Company were under option. These exclude share issues made under the Company’s ESP. expiry Date exercise price 1 July 2008 issued number exercised expired 30 June 2009 31/03/2009 $0.10 10,000,000 10,000,000 - - 10,000,000 10,000,000 - - - - All options expire on the expiry date but do not expire as a result of the termination of the holder’s engagement with the Company. Option holders do not have any right, by virtue of the option, to vote or to participate in any share issue of the Company or any related body corporate. No shares have been issued as a result of the exercise of options since the end of the financial year. There are no amounts unpaid on the shares issued as a result of the exercise of options in the reporting period. During the reporting period there was no forfeiture or vesting of options issued in previous periods. At the end of the reporting period there were no unvested options on issue. LikeLy DeveLopments The likely developments for the 2010 financial year are contained in the operating and financial review as set out on pages 5 to 17. The directors are of the opinion that further information as to the likely developments in the operations of the Group would prejudice the interests of the Company and the Group and it has accordingly not been included. environmentaL reguLation anD performance The Group’s oil and gas exploration and development activities are concentrated in Thailand and Western Australia. Environmental obligations are regulated under both State and Federal Law in Western Australia and under the Department of Mineral Fuels regulations in Thailand. No significant environmental breaches have been notified by any government agency during the year ended 30 June 2009. DiviDenDs No dividends were paid during the year and the directors do not recommend payment of a dividend in respect of the current financial year. auDitor’s inDepenDence DecLaration The auditor’s Independence Declaration under Section 307C of the Corporations Act is set out on page 28 and forms part of the directors’ report for the financial year ended 30 June 2009. principaL activities During the course of the 2009 financial year the Group’s principal activities continued to be directed towards oil and gas exploration, development and production. iDentification of inDepenDent Directors The independent directors are identified in the Corporate Governance Statement section of this Annual Report as set out on pages 72 to 74. 26 Carnarvon Petroleum ltd dIreCtorS’ rePort (Continued) significant changes in state of affairs In the opinion of the directors no significant changes in the state of affairs of the Group occurred during the current financial year other than as outlined in the operating and financial review as set out on pages 5 to 17. inDemnification anD insurance of Directors anD officers During the period the Company paid a premium to insure the directors and officers of the Company and its controlled entities. The policy prohibits the disclosure of the nature of the liabilities covered and the amount of the premium paid. proceeDings on BehaLf of the company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of the proceedings. The Company was not a party to any such proceedings during the year. operating anD financiaL review An operating and financial review of the Group for the financial year ended 30 June 2009 is set out on pages 5 to 17 and forms part of this report. inDemnity of Directors anD company secretary Deeds of Access and Indemnity have been executed by the Company with each of the directors and Company Secretary. The deeds require the Company to indemnify each director and Company Secretary against any legal proceedings, to the extent permitted by law, made against, suffered, paid or incurred by the directors or Company Secretary pursuant to, or arising from or in any way connected with the director or Company Secretary being an officer of the Company. events suBsequent to reporting Date On 28 July 2009 the Company announced that its application to the Australian Government to acquire 100% of a new offshore West Australian permit covering application block WA-435-P had been successful.The application block is situated in the north-western part of the Bedout Sub-basin within the greater Roebuck Basin. In the same bidding round Finder Exploration (“Finder”) was also successful in being awarded 100% of three permits surrounding WA-435-P. Subject to ratification by the government authorities, Carnarvon and Finder have entered into a heads of agreement to swap 50% of Carnarvon’s WA-435-P for 50% of the three new Finder permits WA-436-P, WA- 437-P and WA-438-P. Finder will assume operatorship of all four permits. No other matter or circumstance has arisen since 30 June 2009 that in the opinion of the directors has significantly affected, or may significantly affect in future financial years: (i) (ii) (iii) the Group’s operations, or the results of those operations, or the Group’s state of affairs rounDing off The Company is an entity to which ASIC Class Order 98/100 dated 10 July 1998 applies. In accordance with that Class Order amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the directors. pJ Leonhardt Director Perth, 28 August 2009 2009 annual rePort 27 audItor’S IndePendenCe deClaratIon 28 Carnarvon Petroleum ltd InCome StatementS for the year enDeD 30 June 2009 consoLiDateD company notes 2009 $000 2008 $000 (restated) sales revenue from continuing operations 100,758 63,033 Other income Cost of sales 4 5 896 318 (27,847) (12,392) Administrative expenses Directors’ fees Employee benefits expense Travel related costs Unrealised foreign exchange gain / (loss) New ventures Share-based payments Finance costs (1,445) (212) (829) (424) 2,305 (963) (122) (1) (1,032) (183) (637) (311) (656) (973) (119) 34 2009 $000 - 214 - (1,445) (212) (829) (424) 2,759 (963) (122) (1) 2008 $000 - 251 - (1,032) (183) (637) (311) (1,851) (973) (119) - profit before income tax 72,116 47,082 (1,023) (4,855) Taxes Income tax expense Special remuneratory benefit 9 22,132 13,561 16,452 14,979 Total taxes 35,693 31,431 - - - - - - profit / (loss) from continuing operations 36,423 15,651 (1,023) (4,855) profit / (loss) attributable to members of the company Basic earnings per share from continuing operations (cents per share) Diluted earnings per share from continuing operations (cents per share) 36,423 15,651 (1,023) (4,855) 8 8 5.4 5.4 2.4 2.3 The above income statements should be read in conjunction with the accompanying notes to the financial statements. 2009 annual rePort 29 BalanCe SHeetS as at 30 June 2009 consoLiDateD company 2009 $000 3,380 2,730 - 415 6,525 10,273 115 438 - 1,483 current assets Cash and cash equivalents Trade and other receivables Inventories Other assets notes 2009 $000 2008 $000 (restated) 21(b) 10 12 13 31,099 11,904 3,865 677 28,281 12,443 1,586 299 total current assets 47,545 42,609 non-current assets Trade and other receivables Property, plant and equipment Exploration and evaluation Oil and gas assets Other investments total non-current assets total assets current liabilities Trade and other payables Employee benefits Income tax provision Provisions 10 11 14 15 16 17 24 18 - 353 1,219 49,701 - - 172 379 22,078 - 51,273 22,629 12,309 98,818 65,238 18,834 6,901 49 3,521 3,122 3,368 13 9,304 14,848 1,017 49 - - total current liabilities 13,593 27,533 1,066 non-current liabilities Deferred tax 19 8,964 total non-current liabilities 8,964 3,215 3,215 - - 2008 $000 570 2,788 - 96 3,454 12,713 49 379 - 1,483 14,624 18,078 531 13 - - 544 - - total liabilities net assets equity Issued capital Reserves Retained profits / (accumulated losses) 22,557 30,748 1,066 544 76,261 34,490 17,768 17,534 68,090 (2,215) 10,386 66,738 (6,211) (26,037) 68,090 1,131 (51,453) 66,738 1,226 (50,430) total equity 76,261 34,490 17,768 17,534 The above balance sheets should be read in conjunction with the accompanying notes to the financial statements. 30 Carnarvon Petroleum ltd StatementS of CHanGeS In eQuItY for the year enDeD 30 June 2009 group issued capital $000 retained profits / (accumulated losses) $000 (restated) translation reserve $000 share-based payments reserve $000 total $000 Balance at 1 July 2007 65,041 (41,688) (3,383) 1,487 21,457 Shares issued net of transaction costs Exchange differences on translation of foreign operations Share based payments Profit attributable to members of Company 1,226 - 471 - - - - (4,054) - - 15,651 - - - (261) - Balance at 30 June 2008 66,738 (26,037) (7,437) 1,226 Shares issued net of transaction costs Exchange differences on translation of foreign operations Exchange differences on change in functional currency Share based payments Profit attributable to members of Company 996 - - 356 - - - - - 36,423 - 2,839 1,252 - - - - - (95) - Balance at 30 June 2009 68,090 10,386 (3,346) 1,131 1,226 (4,054) 210 15,651 34,490 996 2,839 1,252 261 36,423 76,261 The above statements of changes in equity should be read in conjunction with the accompanying notes to the financial statements. 2009 annual rePort 31 StatementS of CHanGeS In eQuItY for the year enDeD 30 June 2009 company issued capital $000 accumulated losses $000 share-based payments reserve $000 total $000 Balance at 1 July 2007 65,041 (45,575) 1,487 20,953 Shares issued net of transaction costs Share based payments Loss attributable to members of the Company 1,226 471 - - - (4,855) - (261) - 1,226 210 (4,855) Balance at 30 June 2008 66,738 (50,430) 1,226 17,534 Shares issued net of transaction costs Share based payments Loss attributable to members of the Company 996 356 - - - (1,023) - (95) - Balance at 30 June 2009 68,090 (51,453) 1,131 996 261 (1,023) 17,768 The above statements of changes in equity should be read in conjunction with the accompanying notes to the financial statements. 32 Carnarvon Petroleum ltd StatementS of CaSH floWS for the year enDeD 30 June 2009 consoLiDateD company notes 2009 $000 2008 $000 2009 $000 cash flows from operating activities Receipts from customers and GST recovered Payments to suppliers and employees Income tax and special remuneratory benefit paid Interest received Interest paid net cash flows generated from / (used in) operating activities 21(a) cash flows from investing activities Exploration and development expenditure Joint venture cash assigned to subsidiary Cash held as security Acquisition of property, plant and equipment Net repayments from / (advances to) controlled entities net cash flows (used in) / from investing activities cash flows from financing activities Proceeds from issue of share capital Payment of share issue costs Proceeds from repayment of Employee Share Plan loans net cash flows from financing activities 2008 $000 275 (3,153) - 204 - 114,038 (34,238) (48,177) 973 - 56,145 (13,616) (3,666) 236 (8) 221 (3,832) - 291 - 32,596 39,091 (3,320) (2,674) (35,550) - (429) (300) (17,399) - (3,156) (218) - - (36,279) (20,773) 1,000 (4) 140 1,136 1,230 (3) 90 1,317 (346) (341) (581) (139) 6,366 4,959 1,000 (4) 140 1,136 (628) - (2,656) (13) (1,293) (4,590) 1,230 (3) 90 1,317 net (decrease) / increase in cash and cash equivalents cash and cash equivalents at the beginning of the financial year Effect of exchange rate fluctuations on cash and cash equivalents cash and cash equivalents at the end of the financial year 21(b) (2,547) 19,635 2,775 (5,947) 28,281 8,927 5,365 (281) 570 35 31,099 28,281 3,380 6,520 (3) 570 The above statements of cash flows should be read in conjunction with the accompanying notes to the financial statements. 2009 annual rePort 33 noteS to tHe fInanCIal StatementS 1. reporting entity The consolidated financial report of the Company for the financial year ended 30 June 2009 comprises the Company and its controlled entities (the “Group”) and the Group’s interest in jointly controlled assets. The financial report was authorised for issue by the directors on 28 August 2009. 2. Basis of preparation of the financial report Statement of compliance The financial report is a general purpose financial report prepared in accordance with Australian Accounting Standards (“AASBs”), including Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (“AASB”), and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards (“IFRSs”). Material accounting policies adopted in the preparation of this financial report are presented below. They have been consistently applied unless otherwise stated. Basis of measurement The financial report is prepared on a historical cost basis, except for available-for-sale financial assets and financial instruments at fair value through profit and loss which are measured at fair value. Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency. Use of estimates and judgements The preparation of the financial report requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Key estimate – impairment The Group assesses impairment at each reporting date by evaluating conditions specific to the group that may lead to the impairment of assets. Where an impairment trigger exists, the recoverable amount of the asset is determined. Value-in-use calculations performed in assessing recoverable amounts incorporate a number of key estimates. There was not considered to be any impairment trigger over the carrying value of the Group’s interest in exploration and evaluation or oil and gas assets at the date of this report. Key estimate – income and capital gains taxes Judgement is required in determining any provision for income and capital gains taxes. The Group recognizes liabilities of anticipated tax based on estimates of taxes due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will impact the income tax and deferred tax expenses, assets or provisions in the year in which such determination is made. 34 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 2. Basis of preparation of the financial report (continued) Use of estimates and judgements (continued) Key estimate – special remuneratory benefit tax and income tax The Group’s Phetchabun Basin Joint Venture is subject to Thai income tax at 50% and a special remuneratory benefit (“SRB”) tax on profits, at sliding scale rates (0% - 75% by concession). The SRB, which is tax deductible in the calculation of Thai income taxes, involves a highly detailed calculation done on a concession by concession basis. The basis of the calculation is petroleum profits, adjusted for capital spent, being subjected to a sliding scale SRB rate such that profits are not taxed until all capital has been recovered. The sliding scale rate is principally driven by production and pricing but is subject to other adjustments such as changes in Thailand’s consumer price index, wholesale price index, cumulative metres drilled on the concession, and, for certain concessions, changes in the exchange rate between the Thai Baht and the USD. The SRB calculation is performed and paid annually for each concession at the calculated annual rate at the end of each calendar year. Judgement is required in determining provisions which are based on estimates of amounts due. Where the final outcome of those matters is different from the amounts that were originally recognised, such difference may impact those provisions in the period in which such a determination is made. Key estimate – functional currency The determination of the functional currency of the Company’s controlled entities requires consideration of a number of factors. These factors include the currencies that primarily influence their sales and costs and the economic environment in which the entities operate. Key estimates – other Other areas of judgement are in the determination of oil reserves, rehabilitation provisions, capitalisation of exploration and evaluation costs, determination of areas of interest, and the units of production method of depreciation. 3. significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report. The accounting policies have been applied consistently by all entities in the Group. Certain comparative amounts have been reclassified to conform to the current year’s presentation. (a) Basis of consolidation Controlled entities The consolidated financial report comprises the financial statements of the Company and its controlled entities. A controlled entity is any entity controlled by the Company whereby the Company has the power to control the financial and operating policies of an entity so as to obtain benefits from its activities. All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessary to ensure consistency with those applied by the Company. Where controlled entities enter or leave the economic entity during the year, their operating results are included or excluded from the date control was obtained or until the date control ceased. Investments in controlled entities are carried at cost in the Company’s financial statements. Jointly controlled assets The Group’s share of the assets, liabilities, revenue and expenses of joint venture assets are included in the financial statements under the appropriate headings. 2009 annual rePort 35 noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (b) income tax and special remuneratory benefit Income tax The charge for current income tax expense is based on the result for the year adjusted for any non-assessable or disallowed items. It is calculated using tax rates that have been enacted or are substantively enacted by balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is recognised in the income statement except where it relates to items recognised directly in equity, in which case it is recognised in equity. Deferred income tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and tax losses. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company / group intends to settle its current tax assets and liabilities on a net basis. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. The carrying amount of deferred tax assets is reviewed at each balance date and only recognised to the extent that sufficient future assessable income is expected to be obtained. Special remuneratory benefit The Group’s Phetchabun Basin Joint Venture is subject to a special remuneratory benefit (“SRB”) tax on profits, at sliding scale rates (0% - 75% by concession). The SRB, which is tax deductible in the calculation of Thai income taxes, involves a highly detailed calculation done on a concession by concession basis. The basis of the calculation is petroleum profits, adjusted for capital spent, being subjected to a sliding scale SRB rate such that profits are not taxed until all capital has been recovered. The sliding scale rate is principally driven by production and pricing but is subject to other adjustments such as changes in Thailand’s consumer price index, wholesale price index, cumulative metres drilled on the concession, and, for certain concessions, changes in the exchange rate between the Thai Baht and the USD. The SRB calculation is performed and paid annually for each concession at the calculated annual rate at the end of each calendar year. The SRB is considered, for accounting purposes, to be a tax on income. Tax consolidation Carnarvon Petroleum Limited and its wholly-owned Australian resident controlled entities formed a tax-consolidated group with effect from 1 July 2003 and are therefore taxed as a single entity from that date. Carnarvon Petroleum Limited is the head entity of the tax-consolidated group. In future periods the members of the group will, if required, enter into a tax sharing agreement whereby each company in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. 36 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (c) property, plant and equipment Recognition and measurement All property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. The cost of an item also includes the initial estimate of the costs of dismantling and removing an item and restoring the site on which it is located. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Impairment The carrying amount of property, plant and equipment is reviewed at each balance date to determine whether there are any objective indicators of impairment that may indicate the carrying values may not be recoverable in whole or in part. Impairment testing is carried out in accordance with Note 3(f). Where an asset does not generate cash flows that are largely independent it is assigned to a cash generating unit and the recoverable amount test applied to the cash generating unit as a whole. If the carrying value of the asset is determined to be in excess of its recoverable amount, the asset or cash generating unit is written down to its recoverable amount. Depreciation Depreciation on property plant and equipment is calculated on a straight-line basis over expected useful life to the economic entity commencing from the time the asset is held ready for use. The major depreciation rates used for all classes of depreciable assets are: Property, plant and equipment: 10% to 33% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at least annually. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement. (d) oil and gas assets Oil and gas assets include costs transferred from exploration and evaluation once technical feasibility and commercial viability of an area of interest are demonstrable, together with subsequent costs to develop the asset to the production phase. Where the directors decide that specific costs will not be recovered from future development, those costs are charged to the income statement during the financial period in which the decision is made. Depreciation of oil and gas assets is calculated on a unit of production basis so as to write off costs, including an element of future costs, in proportion to the depletion of the estimated recoverable reserves. Refer to Note (y) for further details on changes in accounting policy. 2009 annual rePort 37 noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (e) exploration and evaluation Exploration and evaluation expenditure incurred is accumulated in respect of each identifiable area of interest. These costs are only carried forward to the extent that the Group’s rights of tenure to the area are current and that the costs are expected to be recouped through the successful development of the area, or where activities in the area have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Each area of interest is assessed for impairment to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. Impairment testing is carried out in accordance with Note 3(f). Accumulated costs in relation to an abandoned area are written off in full against profit in the year in which the decision to abandon the area is made. Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, exploration and evaluation costs attributable to that area of interest are first tested for impairment and then reclassified from exploration and evaluation to oil and gas assets. (f) recoverable amount of assets and impairment testing Assets that have an indefinite useful life are not subject to depreciation and are tested annually for impairment by estimating their recoverable amount. Assets that are subject to depreciation are reviewed annually to determine whether there is any indication of impairment. Where such an indicator exists, a formal assessment of recoverable amount is then made. Where this is less than carrying amount, the asset is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. Value in use is the present value of the future cash flows expected to be derived from the asset or cash generating unit. In estimating value in use, a pre-tax discount rate is used which reflects the current market assessments of the time value of money and the risks specific to the asset. Any resulting impairment loss is recognised immediately in the income statement. For the purposes of impairment testing assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. (g) trade receivables Trade receivables are stated at fair value and subsequently measured at amortised cost, less impairment losses. Impairment testing is carried out in accordance with Note 3(f). (h) provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are determined by discounting the expected future cash flows at a pre-tax discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Restoration costs Any provision for future restoration and rehabilitation costs is capitalised and depreciated in accordance with the policy set out in Note 3(c). The unwinding of the effect of discounting on the provision is recognised as a finance cost. 38 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (i) investments and other financial instruments The Group determines the classification of its financial instruments at initial recognition and re-evaluates this designation at each reporting date. Fair value is the measurement basis, with the exception of held-to-maturity investments and loans and receivables which are measured at amortised cost. Fair value is inclusive of transaction costs. Changes in fair value are either taken to the income statement or to an equity reserve (refer below). Amortised cost is the amount measured at initial recognition, less principal repayments, adjusted for the difference, if any, between initial measurement and the maturity amount calculated using the effective interest method, less any reduction for impairment. The effective interest method is the rate that discounts future expected cash flows through the expected life of the financial instrument to its net carrying amount. Revisions to expected cash flows will require an adjustment to the carrying value with a consequential recognition of an income or expense in profit and loss. Fair value is determined based on current bid prices for all quoted investments. If there is not an active market for a financial asset fair value is measured using established valuation techniques. The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets are impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists the cumulative loss is removed from equity and recognised in the income statement. (i) Financial assets at fair value through profit and loss A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Realised and unrealised gains and losses arising from changes in the fair value of these assets are included in the income statement in the period in which they arise. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method, less any impairment losses. (iii) Held-to-maturity investments These investments have fixed maturities, and it is the group’s intention to hold these investments to maturity. Held-to-maturity investments are stated at amortised cost using the effective interest rate method. (iv) Available-for-sale financial assets Available for sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not included in any of the above categories. Available-for-sale financial assets are reflected at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity in an available-for-sale investments revaluation reserve. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities. (j) segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments that are operating in other economic environments. 2009 annual rePort 39 noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (k) foreign currency Functional and presentation currency The functional currency of each of the group’s entities is measured using the currency of the primary economic environment in which that entity operates (the “functional” currency). The consolidated financial statements are presented in Australian dollars which is the Company’s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary assets and liabilities are translated at the exchange rate at balance sheet date. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge. Translation differences arising on non-monetary items, such as equities held at fair value through profit and loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity. Foreign operations The financial performance and position of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: • • assets and liabilities are translated at exchange rates prevailing at balance sheet date income and expenses are translated at average exchange rates for the period Exchange differences arising on translation of foreign operations are transferred directly to the group’s foreign currency translation reserve as a separate component of equity. These differences are recognised in the income statement upon disposal of the foreign operation. (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 A lease where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments in relation to operating leases are charged to the income statement on a straight-line basis over the period of the lease. (m) share capital Incremental costs directly attributable to an equity transaction are shown as a deduction from equity, net of any recognised income tax benefit. (n) inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less any estimated selling costs. Cost includes those costs incurred in bringing each component of inventory to its present location and condition. 40 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (o) employee benefits Wages and salaries, annual leave Provision is made for the Group’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Share based payments – shares and share options The fair value of shares and share options issued is recognised as an expense with a corresponding increase in equity. Fair value is measured at grant date and recognised over the period during which the grantees become unconditionally entitled to the shares or share options. The fair value of share grants at grant date is determined by the share price at that time. The fair value of share options at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, any vesting and performance criteria, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free rate for the term of the option. Share based payments – Employee Share Plan Share based compensation has been provided to eligible persons via the Carnarvon Employee Share Plan (“ESP”), financed by means of interest free limited recourse loans. Under AASB 2 “Share-based Payments”, the ESP shares are deemed to be equity settled, share based remuneration and treated as an in-substance grant of options. For limited recourse loans issued to eligible persons on or after 1 January 2005, the Group is required to recognise within the income statement a remuneration expense measured at the fair value of the “share option” inherent in the issue to the eligible person, with a corresponding increase to a share-based payments reserve in equity. The fair value is measured at grant date and recognised when the eligible person becomes unconditionally entitled to the shares, effectively on grant. A loan receivable is not recognised. The fair value at grant date is determined using a pricing model that factors in the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield, and the risk free rate for the assumed term of the “option”. Upon the exercise of the “option”, the balance of the share-based payments reserve relating to the “option” is transferred to issued capital. (p) earnings per share The Group presents basic and diluted earnings per share (“EPS”) for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to equity holders of the Company by the weighted number of shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all potential ordinary shares, which comprise share options issued. 2009 annual rePort 41 noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (q) cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits held at call with banks, and other short-term highly liquid investments. (r) revenue Revenue from the sale of goods is measured at the fair value of the consideration received or receivable. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, and the amount of revenue can be measured reliably. For the sale of oil the transfer of risks and rewards occurs on delivery of oil to the refinery. (s) goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (t) trade and other payables Trade and other payables are stated at amortised cost. The amounts are unsecured and usually paid within 60 days of recognition. (u) finance income and expenses Interest revenue on funds invested is recognised as it accrues, using the effective interest rate method. Finance expenses comprise interest expense on borrowings and the unwinding of the discount on provisions. (v) royalties Royalties are treated as taxation arrangements when they have the characteristics of a tax. This is considered to be the case when they are imposed under government authority and the amount payable is calculated by reference to revenue derived (net of any allowable deductions) after adjustment for items comprising temporary differences. For such arrangements, current and deferred tax is provided on the same basis as described above for other forms of taxation. Obligations arising from royalty arrangements that do not satisfy these criteria are recognised as current provisions and included in expenses. (w) comparative figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. 42 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (x) new standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2009 reporting periods. The consolidated entity’s and the parent entity’s assessment of the impact of these new standards and interpretations is set out below. (i) AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 (effective from 1 January 2009). AASB 8 will result in a significant change in the approach to segment reporting, as it requires adoption of a ‘management approach’ to reporting on financial performance. The information being reported will be based on what the key decision makers use internally for evaluating segment performance and deciding how to allocate resources to operating segments. The consolidated entity will adopt AASB 8 from 1 July 2009. It may result in an increase in the number of reportable segments presented. In addition, the segments will be reported in a manner that is more consistent with the internal reporting provided to the chief operating decision-maker. (ii) Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standards arising from AASB 123 (effective from 1 January 2009) The revised AASB 123 has removed the option to expense all borrowing costs and, when adopted, will require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. There will be no impact on the financial report of the consolidated entity. (iii) Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to Australian Accounting Standards arising from AASB 101 (effective from 1 January 2009) The September 2007 revised AASB 101 requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity, but will not affect any of the amounts recognised in the financial statements. If an entity has made a prior period adjustment or has reclassified items in the financial statements, it will need to disclose a third balance sheet (statement of financial position), this one being as at the beginning of the comparative period. The consolidated entity will apply the revised standard from 1 July 2009. (iv) AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations (effective from 1 January 2009) AASB 2008-1 clarifies that vesting conditions are service conditions and performance conditions only and that other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The consolidated entity will apply the revised standard from 1 July 2009, but it is not expected to affect the accounting for the consolidated entity’s share-based payments. (v) Revised AASB 3 Business Combinations, AASB 127 Consolidated and Separate Financial Statements and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 (effective 1 July 2009) The revised AASB 3 continues to apply the acquisition method to business combinations, but with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs must be expensed. The revised AASB 127 requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value, and a gain or loss is recognised in profit or loss. The consolidated entity will apply the revised standards prospectively to all business combinations and transactions with non-controlling interests from 1 July 2009. 2009 annual rePort 43 noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (x) new standards and interpretations not yet adopted (continued) (vi) AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project (effective 1 July 2009) The amendments to AASB 5 Discontinued Operations and AASB 1 First-Time Adoption of Australian-Equivalents to International Financial Reporting Standards are part of the IASB’s annual improvements project published in May 2008. They clarify that all of a subsidiary’s assets and liabilities are classified as held for sale if a partial disposal sale plan results in loss of control. Relevant disclosures should be made for this subsidiary if the definition of a discontinued operation is met. The consolidated entity will apply the amendments prospectively to all partial disposals of subsidiaries from 1 July 2009. (vii) AASB 2008-7 Amendments to Australian Accounting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (effective 1 July 2009) In July 2008, the AASB approved amendments to AASB 1 First-time Adoption of International Financial Reporting Standards and AASB 127 Consolidated and Separate Financial Statements. The consolidated entity will apply the revised rules prospectively from 1 July 2009. After that date, all dividends received from investments in subsidiaries, jointly controlled entities or associates will be recognised as revenue, even if they are paid out of pre-acquisition profits, but the investments may need to be tested for impairment as a result of the dividend payment. Furthermore, when a new intermediate parent entity is created in internal reorganisations it will measure its investment in subsidiaries at the carrying amounts of the net assets of the subsidiary rather than the subsidiary’s fair value. (viii) AASB 2008-8 Amendment to IAS 39 Financial Instruments: Recognition and Measurement (effective 1 July 2009) AASB 2008-8 amends AASB 139 Financial Instruments: Recognition and Measurement and must be applied retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. The amendment makes two significant changes. It prohibits designating inflation as a hedgeable component of a fixed rate debt. It also prohibits including time value in the one-sided hedged risk when designating options as hedges. The consolidated entity will apply the amended standard from 1 July 2009. It is not expected to have an impact on the consolidated entity’s financial statements. 44 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 3. significant accounting policies (continued) (y) change in accounting policy The consolidated entity changed its accounting policy relating to the depreciation of oil and gas assets for the financial year ending 30 June 2009. Depreciation is now calculated using a unit of production method which amortises capitalised costs carried forward plus the estimated future field development costs for proved and probable (“2P”) reserves over the life of the 2P reserves. Previously only capitalised costs were included in the depreciation calculation. This change has been implemented as the directors are of the opinion that a cost base that reflects the future costs of maintaining current production provides more relevant information and a more accurate carrying value of oil and gas assets at balance date. Total costs subject to depletion included $62.5 million of estimated future development costs to deplete the proved and probable reserves. Since an approved development plan has not yet been sanctioned by the joint venture, future costs have been estimated by Carnarvon management based on historical depletion rates of around 500,000 bbls per well and estimated costs for drilling and completion of US$1.5 million per well. It is anticipated that an approved development plan will supersede these estimates. The aggregate effect of the change in accounting policy on the annual financial statements is as follows: Consolidated Income statement Cost of sales Profit before income tax Profit after income tax Balance sheet Oil and gas assets Deferred tax liability Opening retained earnings 2009 previously stated $000 2009 adjusted 2009 restated $000 $000 2008 previously stated $000 2008 adjusted 2008 restated $000 $000 23,080 76,883 38,807 4,767 (4,767) (2,384) 27,847 72,116 36,423 11,346 48,128 16,174 1,046 (1,046) (523) 12,392 47,082 15,651 55,514 11,871 (25,514) (5,813) (2,907) (523) 49,701 8,964 (26,037) 23,124 3,738 (41,688) (1,046) (523) - 22,078 3,215 (41,688) cents cents cents cents cents cents Basic earnings per share Diluted earnings per share 5.7 5.7 (0.3) (0.3) 5.4 5.4 2.4 2.4 - (0.1) 2.4 2.3 There were no adjustments to the Company income statement or balance sheet figures in 2008 or 2009. 2009 annual rePort 45 noteS to tHe fInanCIal StatementS (Continued) consoLiDateD company 2009 $000 896 - 896 (3,892) (7,331) (3,827) (10,057) (2,740) (27,847) 2008 $000 2009 $000 283 35 318 (1,800) (4,374) (1,920) (2,651) (1,647) (12,392) 214 - 214 - - - - - - 2008 $000 251 - 251 - - - - - - 4. other income Finance income on bank deposits Other income 5. cost of sales Production expenses Royalty and excise Transportation Depreciation - development costs and producing assets Selling, general and administration 6. other expenses Depreciation – property, plant and equipment Rental premises – operating leases (162) (234) (73) (131) (57) (184) (34) (66) 7. auditors’ remuneration Audit services: Auditors of the Company 8. earnings per share 108 78 108 78 The calculation of basic and diluted earnings per share was based on a weighted average number of shares calculated as follows: Issued ordinary shares at 1 July Effect of shares issued Effect of share options exercised Weighted average number of ordinary shares 30 June (basic) Effect of share options on issue Weighted average number of ordinary shares 30 June (diluted) 2009 2008 number of shares 672,924,634 583,699 2,493,151 676,001,484 - 676,001,484 657,537,134 186,849 6,979,452 664,703,435 19,163,014 683,866,449 Profit used in calculating basic and diluted earnings per share from continuing operations $36,423,000 $15,651,000 46 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 9. income tax expense Numerical reconciliation between pre-tax profit / (loss) and income tax expense / (benefit): Prima facie income tax expense / (benefit) on pre-tax profit / (loss) at 30% (2008: 30%) 21,634 14,124 (307) (1,457) Tax effect of: Special remuneratory benefit Effect of higher overseas tax rate Foreign exchange (gains) / losses Non-deductible expenditure Prior year losses recognised Prior year temporary differences recognised Current year tax benefit not brought to account Income tax expense on pre-tax profit Current income tax Deferred tax Tax Consolidation (6,781) 12,988 (3,220) 350 (198) (3,434) 793 22,132 16,383 5,749 22,132 (7,552) 10,229 - 322 (3,064) 1,814 579 16,452 13,237 3,215 16,452 - - (836) 350 - - 793 - - - - - - 554 277 - - 626 - - - - Effective 1 July 2003, for the purposes of Australian income taxation, Carnarvon and its 100%-owned controlled entities formed a tax consolidated group. The head entity of the tax consolidated group is Carnarvon. The impact of consolidating for tax purposes is that Carnarvon’s Australian controlled entities are treated as divisions of Carnarvon rather than as separate entities for tax purposes. The members of the group will, if required, enter into a tax sharing arrangement in order to allocate group tax related liabilities to contributing members on a reasonable basis. The agreement will provide for the allocation of income tax liabilities between entities should the head entity default on its tax payment obligations. 10. trade and other receivables Current Trade and other receivables Cash held as security Non-current Amounts receivable from controlled entities Provision for non-recovery consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 8,318 3,586 11,904 - - - 9,287 3,156 12,443 - - - 90 2,640 2,730 10,966 (693) 10,273 132 2,656 2,788 13,406 (693) 12,713 The Group’s exposure to credit and currency risks is disclosed in Note 32. 2009 annual rePort 47 noteS to tHe fInanCIal StatementS (Continued) 11. property, plant and equipment Plant and equipment Cost: Balance at beginning of financial year Additions Transfers Disposals Effects of movements in foreign exchange Balance at end of financial year Depreciation and impairment losses: Balance at beginning of financial year Disposals Transfers Depreciation charge for year Balance at end of financial year Carrying amount opening Carrying amount closing Fixtures and fittings Cost: Balance at beginning of financial year Additions Transfers Disposals Effects of movements in foreign exchange Balance at end of financial year Depreciation and impairment losses: Balance at beginning of financial year Disposals Transfers Depreciation charge for year Balance at end of financial year Carrying amount opening Carrying amount closing Land and buildings Cost: Balance at beginning of financial year Additions Effects of movements in foreign exchange Balance at end of financial year Depreciation and impairment losses: Balance at beginning of financial year Depreciation charge for year Balance at end of financial year Carrying amount opening Carrying amount closing 48 Carnarvon Petroleum ltd consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 74 - (43) - 11 42 67 - (43) 8 32 7 10 319 271 43 (58) 51 626 191 (41) 43 141 334 128 292 38 21 6 65 1 13 14 37 51 89 56 - (63) (8) 74 56 (3) - 14 67 33 7 204 121 - - (6) 319 133 - - 58 191 71 128 - 38 - 38 - 1 1 - 37 - - - - - - - - - - - - - 121 139 - (58) - 202 72 (42) - 57 87 49 115 - - - - - - - - - - - - - - - - - - - - - - 108 13 - - - 121 38 - - 34 72 70 49 - - - - - - - - - noteS to tHe fInanCIal StatementS (Continued) 11. property, plant and equipment (continued) Total Cost: Balance at beginning of financial year Additions Disposals Effects of movements in foreign exchange Balance at end of financial year Depreciation and impairment losses: Balance at beginning of financial year Disposals Depreciation charge for year Balance at end of financial year Carrying amount opening Carrying amount closing 12. inventories Current Raw materials and consumables 13. other assets Current Deposits and prepayments 14. exploration and evaluation Cost: Balance at beginning of financial year Additions Assignment of joint venture to subsidiary Balance at end of financial year 15. oil and gas assets Cost: Balance at beginning of financial year Additions Effects of movements in foreign exchange Balance at end of financial year Depreciation and impairment losses: Balance at beginning of financial year Depreciation charge for year Balance at end of financial year Carrying amount opening Carrying amount closing consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 431 292 (58) 68 733 259 (41) 162 380 172 353 293 215 (63) (14) 431 189 (3) 73 259 104 172 121 139 (58) - 202 72 (42) 57 87 49 115 3,865 1,586 - 108 13 - - 121 38 - 34 72 70 49 - 677 299 415 96 379 915 (75) 1,219 25,340 31,233 6,341 62,914 3,262 9,951 13,213 22,078 49,701 - 379 - 379 12,773 14,475 (1,908) 25,340 644 2,618 3,262 12,129 22,078 379 134 (75) 438 - - - - - - - - - - 379 - 379 - - - - - - - - - For details of the change in oil and gas assets depreciation policy refer to Note 3(y). 2009 annual rePort 49 noteS to tHe fInanCIal StatementS (Continued) consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 16. other investments Non-current Investments in controlled entities – at cost The Group has the following interests in joint venture assets: - - 1,483 1,483 Principal activities Ownership interest % Joint venture Thailand Phetchabun Basin Concession, Exploration Blocks L44/43 and L33/43 3/2546/60 and 5/2546/62 Concessions Exploration Block L20/50 7/2551/98 Concession Western Australia Exploration, development and production of hydrocarbons Exploration for hydrocarbons 40% 50% 35% 50% EP 110 & 424, Carnarvon Basin WA-399-P, Carnarvon Basin Exploration for hydrocarbons Exploration for hydrocarbons Summary financial information for joint venture assets, as included in the consolidated balance sheet and income statement, is shown below: Current assets Cash and cash equivalents Trade and other receivables Inventories Other assets Total current assets Non-current assets Property, plant and equipment Exploration and evaluation Oil and gas assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Deferred tax Total non-current liabilities Total liabilities Net assets Income Expenses Net profit after tax 2009 $000 27,758 9,176 3,865 384 41,183 238 1,189 50,401 51,828 93,011 5,889 6,643 12,532 8,964 8,964 21,496 71,515 100,758 (63,313) 37,445 2008 $000 28,130 9,124 1,586 738 39,578 123 363 22,991 23,477 63,055 2,863 24,152 27,015 3,215 3,215 30,230 32,825 63,033 (44,380) 18,653 Capital commitments and contingent liabilities for the joint ventures are disclosed in Notes 22 and 23 respectively. 50 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 17. trade and other payables Current Trade payables Non-trade payables and accrued expenses Owing to related parties consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 2,686 4,163 52 6,901 2,352 948 68 3,368 368 597 52 1,017 308 155 68 531 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 32. 18. provisions Current Special Remuneratory Benefit - Thailand Non-current Site restoration: Balance at beginning of financial year Provision (reversed) during the year Balance at end of financial year 3,122 3,122 14,848 14,848 - - - 105 (105) - There are no restoration provisions required in respect of the Group’s activities. 19. Deferred tax Recognised deferred tax assets and liabilities The net deferred tax liability is attributable to the following: Oil and gas assets Tax value of losses carry forward Net tax liability 11,232 (2,268) 8,964 5,395 (2,180) 3,215 The movement in the deferred tax liability during the reporting period has all been recognised in income. Unrecognised deferred tax assets and liabilities Deferred tax assets have not been recognised in respect of the following items: - - - - - - - - - - - - - - - - Deductible temporary differences Tax losses 159 2,571 2,730 212 1,631 1,843 459 2,571 3,030 1,518 1,631 3,149 The deductible temporary differences and tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the Group can utilise the benefits. 2009 annual rePort 51 noteS to tHe fInanCIal StatementS (Continued) 20. capital and reserves Issued capital consoLiDateD & company 2009 2008 number of shares Balance at beginning of financial year Employee Share Plan issues Shares issued on exercise of share options Balance at end of financial year 672,924,634 750,000 10,000,000 683,674,634 657,537,134 387,500 15,000,000 672,924,634 Issued capital Balance at beginning of financial year Employee Share Plan related movements Employee Share Plan loans repaid Shares issued on exercise of share options Share issue transaction costs Balance at end of financial year consoLiDateD & company 2009 $000 2008 $000 66,738 216 140 1,000 (4) 68,090 65,041 380 90 1,230 (3) 66,738 Ordinary shares have the right to one vote per share at meetings of the Company, 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. Translation reserve Movements in the translation reserve are set out in the Statement in Changes in Equity on page 31. The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity. Share based payments reserve Movements in the share based payments reserve are set out in the Statements of Changes in Equity on pages 31 and 32. This reserve represents the fair value at grant of share options issued, including the value of shares issued under the Company’s ESP. This reserve is reversed against issued capital when shares are issued on exercise of the options, or, in the case of the shares issued under the ESP, the loan is repaid. 52 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 21. reconciliation of cash flows from operating activities (a) Cash flows from operating activities After tax profit / (loss) for the period Adjustments for: Equity settled share based payment expense Deferred tax expense Depreciation Finance costs for rehabilitation provisions Loss on disposal of property, plant and equipment Foreign exchange (gains) / losses Operating profit before changes in working capital and provisions: Changes in assets and liabilities: Decrease / (increase) in trade and other receivables (Increase) in inventories (Increase) / decrease in other assets Increase in trade and other payables (Decrease) / increase in provisions and employee benefits Net cash flows generated from / (used in) operating activities (b) Reconciliation of cash and cash equivalents consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 36,423 15,651 122 5,749 10,114 - 16 (2,305) 50,119 2,682 (1,972) (185) 150 (18,198) 32,596 119 3,215 2,688 (39) - 656 22,290 (7,789) (604) 273 760 24,161 39,091 (1,023) 122 - 57 - 16 (2,787) (3,615) 74 - (319) 504 36 (4,855) 119 - 34 - - 1,851 (2,851) (9) - (62) 239 9 (3,320) (2,674) Cash at bank and at call 31,099 28,281 3,380 570 The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities is disclosed in Note 32. Restricted cash of $2,640,000 Company and $3,586,000 consolidated is included under trade and other receivables (2008: $2,656,000 Company and $3,156,000 consolidated), see Notes 10 and 23. 2009 annual rePort 53 noteS to tHe fInanCIal StatementS (Continued) consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 22. capital and other commitments (a) Joint venture commitments Share of capital commitments of joint venture assets: Within one year 1,189 1,721 - Capital commitments of the Group to joint venture assets: Within one year (b) Exploration expenditure commitments 2,264 187 2,264 - 187 Due to the nature of the Group’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. Exploration expenditure commitments forecast but not provided for in the financial statements are as follows: consoLiDateD company 2009 $000 4,100 1,700 5,800 2008 $000 500 3,000 3,500 2009 $000 4,100 1,700 5,800 2008 $000 500 3,000 3,500 Less than one year Between one and five years (c) Capital expenditure commitments Data licence commitments 126 96 126 96 23. contingencies The directors are of the opinion that provisions are not required in respect of these matters as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Contingent liabilities not considered remote a) Under the terms of an Investment Agreement the Group is required to pay a percentage of sales proceeds from specified zones within the Wichian Buri Production Licences I and II in Thailand to Gemini Oil and Gas Limited, an independent oil and natural gas investment fund. The current percentage is 7.5%. The Group has expensed US$85,000 in the current period (2008: US$371,000). Cumulative amounts paid and payable at balance date under the terms of this agreement are US$905,000. 54 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 23. contingencies (continued) Contingent liabilities considered remote a) The Phetchabun Basin Joint Venture operation, in which the Group has a 40% interest, has issued bank guarantees for an amount of 40 million Thai Baht as security in lieu of bonds. The L20/50 Joint venture, in which the Group has a 50% interest, has issued bank guarantees for an amount of 20 million Thai Baht as security in lieu of bonds. The Company has provided a cash bond of US$2,125,000 to the Department of Mineral Fuels in Thailand in respect of its obligations for its 50% interest in the L20/50 concession in Thailand. The bond is secured by a cash deposit of US$2,125,000 held with Company’s Australian bank. The Company and its joint venture partner, who has provided a similar guarantee to the Department of Mineral Fuels, have signed a Cross Deed of Indemnity in respect of their respective rights and interests. The restricted cash held by the banks as security for these guarantees totaling $3,586,000 (2008: $3,156,000) is classified under “trade and other receivables”. b) In accordance with normal petroleum industry practice, the Group 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. 24. employee benefits Current: Liability for annual leave Share options consoLiDateD company 2009 $000 2008 $000 2009 $000 2008 $000 49 13 49 13 The number and weighted average exercise price of employee share options is as follows: weighted average exercise price 2009 $0.10 $0.10 - - number of options 2009 10,000,000 10,000,000 - - weighted average exercise price 2008 $0.09 $0.07 $0.10 $0.10 number of options 2008 20,000,000 10,000,000 10,000,000 10,000,000 Outstanding 1 July Exercised during the period Outstanding 30 June Exercisable at 30 June All options on issue at 30 June 2008 had an exercise price of $0.10, expired on 31 March 2009, and were issued to directors or their related parties. The weighted average share price at the date of exercise for employee share options exercised during the period was $0.36 (2008: $0.53) 2009 annual rePort 55 noteS to tHe fInanCIal StatementS (Continued) 24. employee benefits (continued) Share based payments - Employee Share Plan Under the terms of the Carnarvon Employee Share Plan (“ESP”), as approved by shareholders, the Company may, in its absolute discretion, make an offer of ordinary fully paid shares in the Company to any eligible person, to be funded by a limited recourse loan granted by the Company. 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 date of offer. Eligible persons receive an interest free advance to acquire the shares. The movements in the ESP during the financial year, including those held by Key Management Personnel, were as follows: 1 July 2008 issued repaid 30 June 2009 Number of shares Loan Average loan per share 14,852,500 $1,755,353 $0.12 750,000 $285,750 $0.38 895,000 $139,895 $0.16 14,707,500 $1,901,208 $0.13 In accordance with AASB 2 the issue of shares under the ESP are accounted for as an in principle option. The fair value of services received in return for options for both the Company and Group, including shares issued under the ESP and valued as options, is measured by reference to the fair value of share options issued using the Black-Scholes model, as set out below. fair value of share options and related assumptions Fair value at measurement date (cents) Share price at date of issue (cents) Exercise price (cents) Expected volatility Actual / assumed option life Expected dividends Risk-free interest rate Share-based expense recognised key management personnel 2009 key management personnel 2008 - - - - - - - - 30.7 70.1 70.1 55% 3 years Nil 7.5% $61,468 other employees 2009 11.2 to 20.8 26.1 to 48.5 26.1 to 48.5 60% 3 years Nil 3.5% $122,208 other employees 2008 30.7 70.1 70.1 55% 3 years Nil 7.5% $57,627 The current year volatility is intended to reflect the movement of the Company’s share price volatility towards its peers as its oil and gas interests mature. Further details of shares and options issued to directors are set out in Note 28, and in the Remuneration Report set out on pages 20 to 25. 56 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 25. 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 and joint ventures. The Company provided accounting and administrative services to its controlled entities for which it did not charge a management fee. During the financial year ended 30 June 2009 net repayments from controlled entities totalled $6,366,000 (2008: net loans to controlled entities $1,293,000). The carrying value of loans to controlled entities at 30 June 2009 was $10,273,000 (2008: $12,713,000) after provisions of $693,000 (2008: $693,000). These loans are unsecured, non-interest bearing, and have no fixed terms of repayment. Other related party balances At 30 June 2009 an amount of $52,070 (2008: $68,548) is included in Company and consolidated trade and other payables for outstanding director fees and expenses. 26. operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years consoLiDateD company 2009 $000 231 271 502 2008 $000 170 12 182 2009 $000 163 - 163 2008 $000 71 - 71 During the reporting period $371,000 was recognised as an expense in the consolidated income statement in respect of operating leases (2008: $344,000). 2009 annual rePort 57 noteS to tHe fInanCIal StatementS (Continued) 27. segment information Segment information is presented in respect of the Group’s primary format, geographical segments, which is based on the Group’s management and internal reporting structure. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers, and segment assets are based on the geographical location of the assets. The Group operated one business segment during the reporting period, being oil and gas exploration, development and production. Geographical Segments (A$000) australia thailand consolidated 2009 $000 2008 $000 2009 $000 2008 $000 2009 $000 2008 $000 Revenue Sales Other Total revenue Segment result Result from continuing operations Total segment result Assets Oil and gas assets Property, plant and equipment Other Total segment assets Liabilities - 214 214 - 251 251 100,758 682 101,440 63,033 67 63,100 100,758 896 101,654 63,033 318 63,351 (1,023) (1,023) (3,001) (3,001) 37,446 37,446 18,652 18,652 36,423 36,423 15,651 15,651 - 115 6,963 7,078 - 49,701 22,078 49,701 22,078 49 3,833 3,882 238 41,801 91,740 123 39,155 61,356 353 48,764 98,818 172 42,988 65,238 Total segment liabilities 1,066 544 21,491 30,204 22,557 30,478 Other segment information: Capital expenditure Depreciation 139 57 13 34 31,400 10,057 14,614 2,657 31,539 10,114 14,627 2,691 58 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 28. key management personnel disclosures (a) Key management personnel compensation Key management personnel compensation included in employee benefits expense, directors emoluments, share based payments and administration expenses is as follows: Short term employee benefits Post-employment benefits Share-based payments consoLiDateD company 2009 ($) 2008 ($) 2009 ($) 2008 ($) 1,157,213 68,997 - 1,226,210 936,281 21,981 61,468 1,019,730 1,157,213 68,997 - 1,226,210 936,281 21,981 61,468 1,019,730 Information regarding individual directors and executives’ compensation and some equity instruments disclosures, as permitted by Corporations Regulation 2M.3.03, are provided in the Remuneration Report section of the directors’ report as set out on pages 20 to 25. Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the Group since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year end. (b) Options and rights over equity instruments The movement during the reporting period in the number of options over ordinary shares in the Company held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Directors PJ Leonhardt EP Jacobson NC Fearis KP Judge Directors PJ Leonhardt EP Jacobson NC Fearis KP Judge held at 1 July 2008 3,000,000 4,000,000 2,000,000 1,000,000 held at 1 July 2007 6,000,000 8,000,000 2,000,000 4,000,000 exercised (3,000,000) (4,000,000) (2,000,000) (1,000,000) held at 30 June 2009 - - - - exercised (3,000,000) (4,000,000) - (3,000,000) held at 30 June 2008 3,000,000 4,000,000 2,000,000 1,000,000 Options issued as compensation vest immediately. During the financial year there was no forfeiture or vesting of options issued in previous periods. There were no options on issue that were still to vest at the end of the reporting period. 2009 annual rePort 59 noteS to tHe fInanCIal StatementS (Continued) 28. key management personnel disclosures (continued) (c) Loans to key management personnel and their related parties Details of loans to key management personnel and their related parties, which are all interest free loans with limited recourse security over the plan shares provided in accordance with the Company’s Employee Share Plan (“ESP”), are set out below. The loans to directors were made in 2006 in lieu of normal remuneration at a time the Company had no full time employees and limited cash resources. Balance 1 July 2008 ($) Balance highest balance in period ($) 30 June 2009 ($) Loaned in period ($) repaid in period ($) Directors PJ Leonhardt EP Jacobson Executives PP Huizenga RA Anderson Directors PJ Leonhardt EP Jacobson Executives PP Huizenga RA Anderson 270,000 540,000 314,100 81,065 270,000 540,000 253,100 81,065 270,000 540,000 314,100 81,065 - - - - - - 61,000 - Balance 1 July 2007 ($) Balance highest balance in period ($) 30 June 2008 ($) Loaned in period ($) repaid in period ($) 270,000 540,000 244,000 101,242 270,000 540,000 314,100 81,065 270,000 540,000 314,100 101,242 - - - - 70,100 70,100 - 90,277 Details regarding the aggregate of loans, all of which are interest free, made by the Group to key management personnel and their related parties, and the number of individuals in each group, are as follows: 2009 2008 opening balance ($) closing balance ($) number in group at 30 June 1,205,165 911,242 1,144,165 1,205,165 4 4 Mr Huizenga was only classified as a key management person effective 1 January 2008, and his loans are therefore not included in the 1 July 2007 opening balance. (d) Other key management personnel transactions Amounts payable to key management personnel or their related parties at reporting date in respect of outstanding director and consulting fees and expenses are as follows: consoLiDateD company 2009 $000 2008 $000 2009 $000 Current Trade and other payables 212 68 212 2008 $000 68 60 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 28. key management personnel disclosures (continued) (e) Movements in shares The movement during the reporting period in the number of ordinary shares in Carnarvon Petroleum Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: held at 1 July 2008 net acquired/(sold) award under employee share plan received on exercise of options held at 30 June 2009 14,900,000 28,613,793 6,316,186 15,568,596 (900,000) (1,696,458) 83,814 (5,635,741) 2,100,000 3,104,441 (500,000) (1,619,441) - - - - - - 3,000,000 4,000,000 2,000,000 1,000,000 17,000,000 30,917,335 8,400,000 10,932,855 - - 1,600,000 1,485,000 held at 1 July 2007 net acquired/(sold) award under employee share plan received on exercise of options held at 30 June 2008 11,900,000 24,313,793 6,316,186 15,068,596 - 300,000 - (2,500,000) - - - - 3,000,000 4,000,000 - 3,000,000 14,900,000 28,613,793 6,316,186 15,568,596 2,000,000 4,443,490 - (1,439,049) 100,000 100,000 - - 2,100,000 3,104,441 Directors PJ Leonhardt EP Jacobson NC Fearis KP Judge Executives PP Huizenga RA Anderson Directors PJ Leonhardt EP Jacobson NC Fearis KP Judge Executives PP Huizenga RA Anderson Shares allotted under the ESP were funded by interest-free loans with a limited recourse security over the plan shares and subject to the detailed rules of the ESP. In accordance with AASB 2 the issue of shares under the ESP is accounted for as an in principle option. The fair value of share options, including ESP shares issued and valued as options, and their valuation assumptions are set out in Note 24. Information regarding individual directors’ and executives’ compensation, including company loans used to finance the purchase of the ESP shares, is provided in the Remuneration Report section of the directors’ report as set out on pages 20 to 25. 2009 annual rePort 61 noteS to tHe fInanCIal StatementS (Continued) 29. non-key management personnel disclosures Identity of related parties The Group has a related party relationship with its controlled entities (see Note 30), joint venture assets (see Note 16), and with its key management personnel (see Note 28). 30. consolidated entities name country of incorporation 2009 2008 ownership interest Company Carnarvon Petroleum Ltd Controlled entities Carnarvon Thailand Ltd Lassoc Pty Ltd SRL Exploration Pty Ltd British Virgin Islands Australia Australia 100% 100% 100% 100% 100% 100% Investments in controlled entities are measured at cost in the financial statements of the Company. 31. subsequent events On 28 July 2009 the Company announced that its application to the Australian Government to acquire 100% of a new offshore West Australian permit covering application block WA-435-P had been successful. The application block is situated in the north-western part of the Bedout Sub-basin within the greater Roebuck Basin. In the same bidding round Finder Exploration (“Finder”) was also successful in being awarded 100% of three permits surrounding WA-435-P. Subject to ratification by the government authorities, Carnarvon and Finder have entered into a heads of agreement to swap 50% of Carnarvon’s WA-435-P for 50% of the three new Finder permits WA-436-P, WA-437-P and WA-438-P. Finder will assume operatorship of all four permits. No other matter or circumstance has arisen since 30 June 2009 that in the opinion of the directors has significantly affected, or may significantly affect in future financial years: (i) (ii) (iii) the Group’s operations; or the results of those operations; or the Group’s state of affairs 62 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 32. financial risk management The Group’s activities expose it to market risk (including currency risk, commodity price risk and interest rate risk), credit risk and liquidity risk. This note presents qualitative and quantitative information about the Company’s and Group’s exposure to each of the above risks, their objectives, policies and procedures for managing risk, and the management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Group’s overall risk management approach focuses on the unpredictability of financial markets and seeks to minimize the potential adverse effects on the financial performance of the Group. The Group does not currently use derivative financial instruments to hedge financial risk exposures and therefore it is exposed to daily movements in the international oil prices, exchange rates, and interest rates. The Group uses various methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange, and commodity price risk and ageing analysis for credit risk. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor, and market confidence and to sustain future development of the business. Given the stage of the Group’s development there are no formal targets set for return on capital. There were no changes to the Group’s approach to capital management during the year. Neither the Company nor any of its controlled entities are subject to externally imposed capital requirements. (a) Commodity price risk Commodity price risk is the risk of financial loss resulting from movements in the price of the Group’s commodity output, being crude oil. Revenues under the Group’s contractual arrangements with its customer are denominated in US$, linked to the US$ prices of a basket of oil products, and paid in Thai Baht at the average monthly exchange rate. The Group does not currently use derivative financial instruments to hedge commodity price risk and therefore is exposed to daily movements in the prices of these oil products. The Company is not exposed to commodity price risk. Sensitivity analysis An increase of 10% in the achieved monthly oil sale price would have increased equity and pre-tax profit and loss by the amounts shown below. This analysis assumes that all other variables other than royalties, which are directly related to oil revenues, remain constant. The analysis is performed on the same basis for 2008: consoLiDateD equity $000 profit and loss $000 company equity $000 profit and loss $000 30 June 2009 30 June 2008 9,344 5,867 9,344 5,867 - - - - A decrease of 10% in the achieved monthly oil sale price would have decreased equity and pre-tax profit and loss by the amounts shown below. This analysis assumes that all other variables other than royalties, which are directly related to oil revenues, remain constant. The analysis is performed on the same basis for 2008: consoLiDateD equity $000 profit and loss $000 company equity $000 profit and loss $000 30 June 2009 30 June 2008 (9,344) (5,867) (9,344) (5,867) - - - - 2009 annual rePort 63 noteS to tHe fInanCIal StatementS (Continued) 32. financial risk management (continued) (b) Interest rate risk The significance and management of the risks to the Group and the Company is dependent on a number of factors including: Interest rates (current and forward) and the currencies that are held; Level of cash and liquid investments and their term; • • • Maturity dates of investments; • Proportion of investments that are fixed rate or floating rate. The Group manages the risk by maintaining an appropriate mix between fixed and floating rate investments. At the reporting date the effective interest rates of variable rate interest bearing financial instruments of the Company and the Group were as follows. There were no interest-bearing financial liabilities: Carrying amount (A$000) Financial assets Weighted average interest rate (%) Financial assets Sensitivity analysis consoLiDateD company 2009 2008 2009 2008 31,099 28,281 3,380 570 0.4% 0.25% 2.95% 6.14% An increase in 50 basis points from the weighted average year-end interest rates at 30 June would have increased equity and profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2008: consoLiDateD equity $000 profit and loss $000 company equity $000 profit and loss $000 30 June 2009 30 June 2008 140 141 140 141 17 3 17 3 A decrease in 50 basis points from the weighted average year-end interest rates at 30 June would have decreased equity and profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2008: consoLiDateD equity $000 profit and loss $000 company equity $000 profit and loss $000 30 June 2009 30 June 2008 (47) (141) (47) (141) (17) (3) (17) (3) 64 Carnarvon Petroleum ltd noteS to tHe fInanCIal StatementS (Continued) 32. financial risk management (continued) (c) Credit risk Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in a financial loss to the Company or Group, and arises principally from the Group’s receivables from customers and cash deposits. The Company has no trade receivables at June 2009 or June 2008 and has no significant concentration of credit risk. The Group’s trade receivables at both June 2009 and June 2008 are all due from an entity located in Thailand and controlled by its government. This entity has an appropriate credit history with the Group. There were no receivables at 30 June 2009 or 30 June 2008 that were past due. Cash transactions are limited to financial institutions considered to have a suitable credit rating. Credit risk further arises in relation to financial guarantees given to certain parties, refer to Note 23. Exposure to credit risk is considered minimal but is monitored on an ongoing basis. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: consoLiDateD company Carrying amount: Cash and cash equivalents Trade and other receivables 2009 $000 31,099 11,904 43,003 2008 $000 28,281 12,443 40,724 The aging of the Group’s trade receivables at reporting date was: Not past due gross 2009 $000 7,218 7,218 impairment 2009 $000 - - 2009 $000 3,380 13,003 16,383 gross 2008 $000 9,255 9,255 2008 $000 570 15,501 16,071 impairment 2008 $000 - - Based on historic default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables. 2009 annual rePort 65 noteS to tHe fInanCIal StatementS (Continued) 32. financial risk management (continued) (d) Currency risk Currency risk arises from sales, purchases, assets and liabilities that are denominated in a currency other than the functional currencies of the entities within the Group, being the A$, THB and US$. The Group operates predominantly in Thailand and is exposed to currency risk arising from various foreign currency exposures, mainly with respect to the US$ and Thai Baht ( THB ). The functional currency of its Thai operations changed from US$ to THB from 1 January 2009, primarily because the trend in the source currency of the majority of its costs from US$ to THB was not considered temporary. The effect of this change was to increase Property, Plant and Equipment and the Translation Reserve by $1,252,000. Cash receipts from the Thai operations, which comprise 100% of the Group revenues, are received in Thai Baht. The majority of the Group’s payments, including Thai SRB and income tax, are also payable in THB which effectively creates a natural hedge. The Company’s foreign exchange risk predominantly resides in its US$ loan to one of its controlled entities. The Group does not currently use derivative financial instruments to hedge foreign currency risk and therefore is exposed to daily movements in exchange rates. However, the Group intends to maintain sufficient THB cash balances to meet its THB obligations, in particular its SRB and income tax liabilities. The Company and Group’s exposure to foreign currency risk at balance date was as follows, based on carrying amounts. Consolidated 2009 Cash and cash equivalents Trade and other receivables Trade payables and accruals SRB and income tax provisions Gross balance sheet exposure Company 2009 Cash and cash equivalents Trade and other receivables Trade payables and accruals Gross balance sheet exposure Consolidated 2008 Cash and cash equivalents Trade and other receivables Trade payables and accruals SRB and income tax provisions Gross balance sheet exposure Company 2008 Trade and other receivables Trade payables and accruals Gross balance sheet exposure thB a$000 27,405 8,208 (5,304) (6,643) 23,666 - - - - 27,634 9,255 (1,561) (24,152) 11,176 - - - usD a$000 gBp a$000 48 - (754) - (706) 14 10,760 (11) 10,763 114 - (493) - (379) 13,625 (10) 13,615 - - - - - - - - - - - (36) - (36) - (36) (36) The following significant exchange rates applied during the year: auD to: 1 Thai baht 1 USD 66 Carnarvon Petroleum ltd average rate 2009 0.040 1.36 2008 0.036 1.12 reporting date spot rate 2008 2009 0.037 1.24 0.031 1.04 noteS to tHe fInanCIal StatementS (Continued) 32. financial risk management (continued) (d) Currency risk (continued) Sensitivity analysis A 10% strengthening of the AUD against the US$ for the 6 months to 31 December 2008 and against the THB for the 6 months to 30 June 2009, reflecting the change in functional currency of the Phetchabun Basin Joint Venture from 1 January 2009, and against the THB as at 30 June 2009, would have decreased equity and pre-tax profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates and the exchange rate between the Thai Baht and USD, remain constant: 30 June 2009 THB and US$ 30 June 2008 USD consoLiDateD equity $000 profit and loss $000 company equity $000 profit and loss $000 (7,752) (3,439) (5,077) (2,137) (1,232) (1,237) (1,232) (1,237) A 10% weakening of the AUD against the US$ for the 6 months to 31 December 2008 and against the THB for the 6 months to 30 June 2009, reflecting the change in functional currency of the Phetchabun Basin Joint Venture from 1 January 2009, and against the THB as at 30 June 2009, would have increased equity and pre-tax profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates and the exchange rate between the Thai Baht and USD, remain constant: 30 June 2009 THB and USD 30 June 2008 USD (e) Fair values consoLiDateD equity $000 profit and loss $000 company equity $000 profit and loss $000 9,412 4,203 6,206 2,612 1,232 1,515 1,232 1,515 The fair values of financial assets and financial liabilities, together with their carrying amounts shown in the balance sheet, are as follows: Consolidated Loans and receivables Cash and cash equivalents Trade and other payables Company Loans and receivables Investment in controlled entities Cash and cash equivalents Trade and other payables carrying amount 2009 $000 11,904 31,099 (6,901) 36,102 13,003 1,483 3,380 (1,017) 16,849 fair value 2009 $000 11,904 31,099 (6,901) 36,102 13,003 1,483 3,380 (1,017) 16,849 carrying amount 2008 $000 12,443 28,281 (3,368) 37,356 15,501 1,483 570 (531) 17,023 fair value 2008 $000 12,443 28,281 (3,368) 37,356 15,501 1,483 570 (531) 17,023 The basis for determining fair values is disclosed in Note 3(i). 2009 annual rePort 67 noteS to tHe fInanCIal StatementS (Continued) 32. financial risk management (continued) (f) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The Group’s approach to managing this risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due under a range of financial conditions. The net cashflows arising from its Thai assets are considered to generate sufficient working capital to adequately address this risk. Neither the Company nor the Group currently has any available lines of credit. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of any netting agreements: Consolidated 2009 Non-derivative financial liabilities Trade and other payables SRB and income tax provisions Company 2009 Non-derivative financial liabilities Trade and other payables Consolidated 2008 Non-derivative financial liabilities Trade and other payables SRB and income tax provisions Company 2008 Non-derivative financial liabilities Trade and other payables carrying amount $000 contractual cashflows $000 6 months or less $000 6 to 12 months $000 6,901 6,643 13,544 6,901 6,643 13,544 6,901 3,521 10,422 1,017 1,017 1,017 1,017 1,017 1,017 - 3,122 3,122 - - 3,368 24,152 27,520 3,368 24,152 27,520 3,368 9,304 12,672 - 14,848 14,848 531 531 531 531 531 531 - - 68 Carnarvon Petroleum ltd dIreCtorS’ deClaratIon (1) In the opinion of the directors of Carnarvon Petroleum Limited: (a) the financial statements and notes of the Company and of the Group set out on pages 29 to 68 are in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Company’s and Group’s financial position as at 30 June 2009 and of their performance, as represented by the results of their operations and their cash flows, for the financial year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the 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. (2) This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 30 June 2009. Signed in accordance with a resolution of the directors. pJ Leonhardt Director Perth, 28 August 2009 2009 annual rePort 69 audIt rePort 70 Carnarvon Petroleum ltd audIt rePort (Continued) 2009 annual rePort 71 CorPorate GovernanCe Statement introDuction The Company’s directors are fully cognisant of the Corporate Governance Principles and Best Practice Recommendations published by the ASX Corporate Governance Council (“CGC”) and have adopted those recommendations where they are appropriate to the Company’s circumstances. However, a number of those principles and recommendations are directed towards listed companies considerably larger than Carnarvon, whose circumstances and requirements accordingly differ markedly from the Company’s. For example, the nature of the Company’s operations and its low direct employee count mean that a number of the board committees and other governance structures recommended by the CGC are not only unnecessary in Carnarvon’s case, but the effort and expense required to establish and maintain them would, in the directors’ view, be an unjustified diversion of shareholders’ funds. Carnarvon’s directors are aware that according to one school of thought listed companies will be rated by the investment community according to their compliance with the CGC’s Best Practice Recommendations. However, in the directors’ view that approach is not soundly based, particularly where unquestioning compliance with the recommendations would produce marginal or no benefit to shareholders. In discharging its functions Carnarvon’s board of directors receives competent legal and other professional advice. Based on that advice the board is satisfied that, notwithstanding non-compliance with the Best Practice Recommendations (to the extent noted below), the Company’s governance structures are appropriate for its circumstances and the board acts at all times in the best interests of the Company and its shareholders. The following additional information about the Company’s corporate governance practices is set out on the Company’s website at www. carnarvonpetroleum.com: • • • • • • • • • • • Corporate governance disclosures and explanations; Statement of Board and management functions; Composition of the Board and new appointments; Committees of the Board; Summary of code of conduct for directors; Summary of policy on securities trading; Audit Committee Charter; Summary of policy and procedures for compliance with ASX Listing Rule disclosure requirements; Summary of arrangements regarding communication with and participation of shareholders; Summary of Company’s risk management policy; and Corporate code of conduct. skills, experience, expertise and term of office of each director A profile of each director containing the applicable information is set out in the directors’ report. statement concerning availability of independent professional advice If a director considers it necessary to obtain independent professional advice to properly discharge the responsibility of his/her office as a director then, provided the director first obtains approval for incurring such expense from the chairman, the Company will pay the reasonable expenses associated with obtaining such advice. 72 Carnarvon Petroleum ltd CorPorate GovernanCe Statement (Continued) explanations for departures from best practice recommendations From 1 July 2008 to 30 June 2009 (the Reporting Period ) the Company complied with each of the Essential Corporate Governance Principles (Note 1 below) and the corresponding Best Practice Recommendations (Note 2 below) as published by the ASX Corporate Governance Council (“ASX Principles and Recommendations”), other than in relation to the matters specified below: principle reference recommendation reference notification of Departure explanation for Departure 2 4 8 2.4 4.2 8.1 A separate Nomination Committee has not been formed. The Audit Committee comprised two independent directors. An additional independent director was appointed on 1 July 2009. A Remuneration Committee was appointed on 1 August 2008. The Board considers that the Company is not currently of a size to justify the formation of a Nomination Committee. The Board as a whole undertakes the process of reviewing the skills base and experience of existing directors to enable identification or attributes required in new directors. Where appropriate independent consultants are engaged to identify possible new candidates for the Board. In accordance with Listing Rule 12.7, the Company was not required to comply with Recommendation 4.2 prior to admission to the ASX top 300. Prior to its formation the Board considered that the Company was not of a size to justify the formation of a Remuneration Committee. The Board as a whole undertook the role of this committee prior to its formation. Notes (1) A copy of the Ten Essential Corporate Governance Principles is set out on the Company’s website under the section entitled “Corporate Governance”. (2) A copy of the Best Practice Recommendations is set out on the Company’s website under the section entitled “Corporate Governance”. 2009 annual rePort 73 CorPorate GovernanCe Statement (Continued) existence and terms of any schemes for retirement benefits for non-executive directors The Company does not have any terms or schemes relating to retirement benefits for non-executive directors. company’s remuneration policies The Company‘s remuneration policies are set out in the Remuneration Report on pages 20 to 25. The Company has separate remuneration policies for executive and non-executive directors. Non-executive directors receive a fixed fee and, when appropriate, share options or participation in the Employee Share Scheme. Executive directors receive a salary or fee and, when appropriate, shares, share options, or participation in the Employee Share Scheme. material business risks Management has reported to the Board as to the effectiveness of the Company’s management of its material business risks. performance evaluation of the Board, its committees and senior executives The Board reviews and evaluates the performance of the Board and its committees, which involves consideration of all the Board‘s key areas of responsibility. A performance evaluation of senior executives was undertaken during the year, in the case of the Chief Executive by the Board, and in all other cases by the Chief Executive Officer and the Chairman. identification of independent directors The Company’s independent directors are considered to be Peter Leonhardt, Neil Fearis, and Ken Judge. None of these directors was considered to have a material relationship with the Company or another group member during the Reporting Period as professional advisor, consultant, supplier, customer, or through any other contractual relationship, nor did they have any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company. The Board considers material in this context to be where any director-related business relationship represents the lesser of at least 5% of the Company’s or the director-related business‘s revenue. number of audit committee meetings and names of attendees The number of Audit Committee meetings and names of attendees is set out in the directors’ report. names and qualifications of audit committee members The names and qualifications of Audit Committee members are set out in the directors report. 74 Carnarvon Petroleum ltd addItIonal SHareHolder InformatIon Additional information required by the ASX Limited (“ASX”) Listing Rules and not disclosed elsewhere in this report is set out below. a) shareholdings as at 26 august 2009 Substantial shareholders The following substantial shareholder notices are lodged with the Company: Name of Shareholder Number of Shares Barclays Global Investors Australia Limited 36,107,227 % held 5.28 Voting Rights The voting rights attaching to Ordinary Shares are governed by the Constitution. On a show of hands every person present who is a member or representative of a member shall have one vote and on a poll, every member present in person or by proxy or by attorney or duly authorised representative shall have one vote for each share held. No options have any voting rights. Twenty Largest Shareholders name of shareholder number of shares % held HSBC Custody Nominees (Australia) Limited National Nominees Limited J P Morgan Nominees Australia Limited ANZ Nominees LimitedMr Edward Patrick Jacobson Citicorp Nominees Pty Limited Pendomer Investments Pty Ltd Cogent Nominees Pty Limited Jacobson Geophysical Services Pty Ltd Mr Peter James Leonhardt Arne Investments Pty Ltd Cogent Nominees Pty Limited Mr Gregory John Munyard + Mrs Maria Ann Munyard + Miss Carmen Helene Munyard Geolyn Pty Ltd Mr Edward Patrick Jacobson Queensland Investment Corporation UBS Nominees Pty Ltd Australian Reward Investment Alliance Athol Steel Pty Ltd Arne Investments Pty Ltd 59,302,913 56,695,602 53,743,584 18,024,980 12,917,903 11,143,997 8,400,000 8,132,673 8,000,000 7,700,000 6,710,493 6,354,899 6,164,000 6,000,000 6,000,000 4,105,911 4,105,900 4,028,214 4,000,000 3,991,906 295,522,975 8.67 8.29 7.86 2.64 1.89 1.63 1.23 1.19 1.17 1.13 0.98 0.93 0.90 0.88 0.88 0.60 0.60 0.59 0.59 0.58 43.23 Distribution of equity security holders size of holding 1 1,001 5,001 10,001 100,001 to to to to and over 1,000 5,000 10,000 100,000 number of shareholders number of fully paid shares 520 2,273 1,854 3,576 618 8,841 360,338 7,175,157 15,712,034 124,650,381 535,776,724 683,674,634 The number of shareholders holding less than a marketable parcel of ordinary shares is 896. 2009 annual rePort 75 addItIonal SHareHolder InformatIon (Continued) b) option holdings as at 26 august 2009 There were no share options on issue. c) on-market buyback There is no current on-market buyback. d) schedule of permits permit SW1A Basin/country Phetchabun / Thailand L33/43 Phetchabun / Thailand L44/43 Phetchabun / Thailand L20/50 Phitsanulok / Thailand Joint venture partners equity % Carnarvon Pan Orient Energy Carnarvon Pan Orient Energy Carnarvon Pan Orient Energy Carnarvon Sun Resources 40% 60% 40% 60% 40% 60% 50% 50% operator Pan Orient Energy Pan Orient Energy Pan Orient Energy Carnarvon EP321 & EP407 Perth / Australia Carnarvon 2.5% ORRI Latent Petroleum WA-399-P Carnarvon / Australia Carnarvon / Australia EP110 & EP 424 WA-345-P Carnarvon Rialto Energy Carnarvon Strike Oil Pancontinental Oil and Gas 50% 50% 35% 40% 25% Carnarvon Strike Oil Roebuck / Australia Carnarvon 100% Carnarvon 76 Carnarvon Petroleum ltd Ground Floor 1322 Hay Street West Perth WA 6005 Telephone: +61 8 9321 2665 Facsimile: +61 8 9321 8867 Email: admin@carnarvonpetroleum.com Website: www.carnarvonpetroleum.com Ground Floor 1322 Hay Street West Perth WA 6005 Telephone: +61 8 9321 2665 Facsimile: +61 8 9321 8867 Email: admin@carnarvonpetroleum.com Website: www.carnarvonpetroleum.com