Press release from Marketwire
Ithaca Energy Inc.: First Quarter 2012 Financial Results
Monday, May 14, 2012
Ithaca Energy Inc.: First Quarter 2012 Financial Results02:00 EDT Monday, May 14, 2012LONDON, UNITED KINGDOM and CALGARY, ALBERTA--(Marketwire - May 14, 2012) -NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATESIthaca Energy Inc. ("Ithaca" or "the Company") (TSX:IAE)(AIM:IAE) announces its quarterly financial results for the three months ended March 31, 2012. HIGHLIGHTSFinancial Cashflow from Operations of US$28.4 million (Q1 2011: US$22.1 million). Profit before tax of US$13.8 million (Q1 2011: US$12.3 million). Profit before tax was impacted by an exceptional non-cash charge of US$1.3 million attributable to revaluation of the contingent consideration payable on approval of the Stella and Harrier Field Development Plan. Earnings per share of US$0.05 (Q1 2011: US$0.01). Cash US$110.6 million (Q4 2011: US$112.1 million), inclusive of US$20.7 million restricted cash, with senior debt facility remaining undrawn. UK tax allowances pool of US$330 million (Q4 2011 $325 million). Operational & CorporateExport production of 4,299 boepd (Q1 2011 3,494 boepd). Obtained operatorship of the Carna discovery and increased the Company's working interest from 16% to 32%. Entered into oil swaps for 768,800 barrels of oil at a weighted average price of $116.07 / bbl for the period March 2012 - June 2013. In March 2012, the UK Government increased the Small Field Allowance ("SFA") tax shelter for future developments and increased the threshold for qualifying fields. This change brings the Stella field under the SFA tax shelter and doubles the relief expected for all the Company's other future developments. During the quarter the Company announced that it had received a confidential, non-binding proposal to acquire all of the outstanding shares of the Company. Following this, a further announcement was made highlighting that the Company had subsequently received unsolicited interest from a number of third parties and that the Company would enter into discussions with all bona fide parties to ensure the maximization of shareholder value. An announcement was made on 7 May 2012 confirming that the discussion process is ongoing and that a timetable for the submission of final bids has been set. The Board has stressed that there is no certainty of an offer being made for the Company. POST QUARTER END EVENTSThe Company received Stella and Harrier Fields Development Plan approval from the UK Government in April 2012. The joint development of the Stella and Harrier fields will involve the drilling of subsea horizontal wells tied back to the FPF-1 floating production unit, with the export of processed hydrocarbons to nearby oil and gas transportation pipelines. The BW Athena FPSO arrived on location at the Athena field in April 2012 and was connected to the STP mooring buoy. Completion of the hook up and infield commissioning is well advanced and the Company is preparing for first oil with a full start up team now on the FPSO. The Company will announce first oil when oil is flowing into the FPSO and make a further announcement upon stabilized initial rates being achieved. The Company entered into put options, at a market price, for 390,000 barrels of oil at a weighted average oil price floor of $120.24 / bbl for the period May 2012 - February 2013. The Company completed various transactions entered into with Petrofac and Dyas on October 19, 2011, concerning the Greater Stella Area assets. Notes:Further details on the above are provided in the Interim Consolidated Financial Statements and Management's Discussion and Analysis for the three months ended March 31, 2012, which have been filed with securities regulatory authorities in Canada. These documents are available on the System for Electronic Document Analysis and Retrieval at www.sedar.com and on the Company's website: www.ithacaenergy.com.Notes to oil and gas disclosure:In accordance with AIM Guidelines, Hugh Morel, BSc Physics and Geology (Durham), PhD Hydrogeology (London) and senior petroleum engineer at Ithaca Energy is the qualified person that has reviewed the technical information contained in this press release. Dr Morel has 30 years operating experience in the upstream oil industry.The term "boe" may be misleading, particularly if used in isolation. A boe conversion of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. About Ithaca Energy:Ithaca Energy Inc. and its wholly owned subsidiary Ithaca Energy (UK) Limited (together "Ithaca" or "the Company"), is an oil and gas exploration, development and production company active in the United Kingdom's Continental Shelf ("UKCS"). The goal of Ithaca, in the near term, is to maximize production and achieve early production from the development of existing discoveries on properties held by Ithaca, to originate and participate in exploration and appraisal on properties held by Ithaca when capital permits, and to consider other opportunities for growth as they are identified from time to time by Ithaca.NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATESReader Advisory Forward-looking statements This news release contains certain forward looking statements. The reader is cautioned that all such forward looking statements involve substantial risks and uncertainties and the assumptions used in their preparation may not prove to be correct. Ithaca's actual results could differ materially from those expressed in, or implied by, these forward looking statements and accordingly, the forward looking statements are qualified by reference to these cautionary statements. The forward looking statements contained herein are made as at the date of this news release. Ithaca undertakes no obligation to update or publicly revise forward looking statements or information unless so required by applicable securities laws. TSX notifications Cenkos Securities plc, which is authorised and regulated in the United Kingdom by the Financial Services Authority under FSA number 416932, is acting exclusively as Nominated Adviser and Joint Broker to the Company and is not acting for or advising any other person and accordingly will not be responsible to any person other than the Company for providing advice in relation to the contents of this announcement. Neither Cenkos Securities plc nor any of its affiliates owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a customer of Cenkos Securities plc in connection with this announcement, any statement contained herein or otherwise. This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities whether pursuant to this announcement or otherwise. ITHACA ENERGY INC.MANAGEMENT'S DISCUSSION AND ANALYSISFOR THE QUARTER ENDED MARCH 31, 2012The following is management's discussion and analysis ("MD&A") of the operating and financial results of Ithaca Energy Inc. (the "Corporation" or "Ithaca" or the "Company") for the three months ended March 31, 2012. The information is provided as of May 11, 2012. The first quarter 2012 results have been compared to the results of the comparative period in 2011. This MD&A should be read in conjunction with the Corporation's unaudited consolidated financial statements as at March 31, 2012 and with the Corporation's audited consolidated financial statements as at December 31, 2011 together with the accompanying notes, MD&A and Annual Information Form ("AIF") for the 2011 fiscal year. These documents and additional information about Ithaca are available on SEDAR at www.sedar.com.Certain statements contained in this MD&A, including estimates of reserves, estimates of future cash flows and estimates of future production as well as other statements about future events or anticipated results, are forward-looking statements. The forward-looking statements contained herein are based on assumptions and are subject to known and unknown risks, uncertainties and other factors. Should the underlying assumptions prove incorrect or should one or more of these risks, uncertainties or factors materialize, actual results may vary significantly from those expected. See "Forward-Looking Information", below.All financial data contained herein is presented in accordance with International Financial Reporting Standards ("IFRS") and is expressed in United States dollars ("$"), unless otherwise stated. BUSINESS OF THE CORPORATIONIthaca is an oil and gas company focused on production, appraisal, and development activities in the United Kingdom's Continental Shelf ("UKCS"). Ithaca's strategy is to:Fast track, appraise and develop oil and gas fields Acquire producing fields or undeveloped discoveries that: are not material for larger companies need technical or financial investment no longer fit with an existing company's strategy and business model Use tried and tested development and production technologies Employ in-house technical excellence to generate development and acquisition opportunities Participate in licensing rounds to gain acreage positions around its core assets Lever its commercial and operator capability to establish solid equity positions Prioritize capital investment to accretive projects with early production and significant cash flow Since November 1, 2011 the Corporation's common shares have traded on the Toronto Stock Exchange in Canada under the symbol "IAE" (previously traded on the TSX Venture Exchange). The Corporation's shares continue to trade on the London Stock Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE".NON-IFRS MEASURES'Cashflow from operations' referred to in this MD&A is not prescribed by IFRS. This non-IFRS financial measure does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented by other companies. The Corporation uses this measure to help evaluate its performance. As an indicator of the Corporation's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Corporation considers cashflow from operations to be a key measure as it demonstrates the Corporation's ability to generate the cash necessary to fund operations and support activities related to its major assets. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash provided by operating activities.BOE PRESENTATIONThe calculation of barrels of oil equivalent ("boe") is based on a conversion rate of six thousand cubic feet of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. HIGHLIGHTS FIRST QUARTER 2012FinancialCashflow from operations of $28.4 million (Q1 2011: $22.1 million). Profit before tax of $13.8 million (Q1 2011: $12.3 million) and net earnings of $12.9 million (Q1 2011: $3.8 million). Profit before tax was impacted by an exceptional non-cash charge of US$1.3 million attributable to revaluation of the contingent consideration payable on approval of the Stella and Harrier Field Development Plan. Average realized oil price of $116.42 / bbl (Q1 2011: $111.19 / bbl). Cash of $110.6 million, inclusive of $20.7 million restricted cash, with senior debt facility remaining undrawn. UK tax allowances pool of $330 million. Operational & Corporate Export production of 4,299 boepd (Q1 2011: 3,494 boepd). Obtained operatorship of the Carna discovery and increased working interest from 16% to 32%. Entered into two oil swaps 768,800 barrels of oil at a weighted average price of $116.07 / bbl for the period March 2012 - June 2013. Post quarter endObtained Field Development Plan ("FDP") approval from the Department of Energy and Climate Change ("DECC") for the Stella and Harrier fields. BW Athena arrived on location at the Athena field and was successfully connected to the "STP" mooring buoy. Entered into put options, at a market price, for 390,000 barrels of oil at a weighted average oil price floor of $120.24 / bbl for the period May 2012 - February 2013. Completed various transactions entered into with Petrofac and Dyas on October 19, 2011, concerning the Greater Stella Area assets. KEY PROJECTS UPDATEAthenaFollowing completion by BW Offshore of the upgrade and modifications work programme on the "BW Athena" floating production, storage and offloading vessel ("FPSO"), the vessel departed Dubai Dry Docks World in February 2012 for deployment on the Athena field. The FPSO arrived on location at the Athena field in mid-April 2012 and was successfully connected to the "STP" mooring buoy. Shuttle tanker offloading tests have recently been performed as part of pre-production FPSO system commissioning activities. Completion of the hook up and infield commissioning is well advanced and the Company is preparing for first oil with a full start up team now on the FPSO. The Company will announce first oil when oil is flowing into the FPSO and make a further announcement upon stabilized initial rates being achieved. Greater Stella AreaDuring the first quarter of 2012 the Company completed its formal application for Government approval of the Stella and Harrier FDP, resulting in the FDP being approved by DECC in April 2012.Competitive tendering of the packages for construction, procurement and installation of the subsea infrastructure required for the Stella development has been ongoing in Q1 2012, with the main contract awards anticipated in Q2 2012. The Company completed its preparation for commencement of drilling operations on the Hurricane appraisal well during the quarter. The well is now scheduled to spud in late Q2 2012, later than originally anticipated due to delays in the drilling programmes being performed for other operators prior to the contracted rig being moved to the Hurricane well location.OTHER DEVELOPMENTSCorporate eventsDuring the quarter the Company announced that it had received a confidential, non-binding proposal to acquire all of the outstanding shares of the Company. Following this, a further announcement was made highlighting that the Company had subsequently received unsolicited interest from a number of third parties and that the Company would enter into discussions with all bona fide parties to ensure the maximization of shareholder value. An announcement was made on 7 May 2012 confirming that the discussion process is ongoing and that a timetable for the submission of final bids has been set. The process is being overseen by a Special Committee of Ithaca's Non-Executive Directors with advice from the Company's financial advisor, CIBC World Markets Inc. The Board has stressed that there is no certainty of an offer being made for the Company.Operatorship of CarnaIn March 2012, the Company agreed to take over operatorship and increase its working interest in the Carna discovery, located in the Southern Gas Basin of the UK North Sea. The transaction with Centrica North Sea Gas Limited increased the Company's working interest in Carna from 16% to 32%. The Company has agreed to a work programme with all of the joint venturers to accelerate development studies and, if appropriate, to submit a Field Development Plan for approval to DECC before the end of 2012. Change to Small Field AllowanceIn March 2012, the UK Government increased the Small Field Allowance ("SFA") tax shelter for future developments. The SFA allows qualifying fields exemption from the 32% Supplemental Charge on a specified portion of net cashflows. The size of fields that qualify for full SFA was increased to include all fields with reserves of under 45 mmboe and the tax allowance available to each field has been doubled from approximately $120million to $240 million.This recent tax change brings the Stella field under the SFA tax shelter and doubles the relief expected for all other developments including Harrier, Hurricane, Carna, Scolty Area (Scolty, Crathes and Torphins) and South West Heather. Jacky J03 court proceedings On February 1, 2011, the Company announced that it had commenced proceedings against North Sea Energy (UK) Limited in the High Court of Justice in London for a declaration that the Jacky J03 well was drilled as a "Joint Operation" under the joint operating agreement. A trial took place in the Commercial Court of the High Court of Justice commencing on April 19th 2012 and concluded with closing submissions on May 8th 2012. The High Court's decision is now awaited.RESULTS OF OPERATIONSRevenueRevenue increased $9.5 million in Q1 2012 to $40.6 million (Q1 2011 $31.1 million). This movement mainly comprises an increase in oil sales volumes in addition to a rise in average realized oil prices, partially offset by a reduction in gas sales. Oil sales volumes increased primarily due to the addition of Cook and Broom liftings in Q1 2012 offset by a reduction in Beatrice production and the expected natural decline from the Jacky field. The Corporation also benefited from an increase in average realized oil prices from $111.19 / bbl in Q1 2011 to $116.42 / bbl in Q1 2012 as the Brent oil price continued to strengthen during the quarter.The decrease in gas sales in the quarter was due to a reduction in Anglia and Topaz gas volumes, partially offset by the addition of Cook gas sales, together with a reduction in the average realized gas price from $46.45/therm to $40.95/therm. Cost of Sales Cost of sales increased in Q1 2012 to $26.0 million (Q1 2011 $17.7 million) due to increases in both operating costs and depletion, depreciation and amortization ("DD&A"), partially offset by movement in oil and gas inventory. Operating costs increased in the period to $15.7 million (Q1 2011 $10.3 million) primarily due to the inclusion of Cook and Broom operating costs in Q1 2012 (assets were acquired in H2 2011).DD&A expense for the quarter increased to $13.4 million (Q1 2011 $7.4 million). This was primarily due to the addition of the Cook and Broom assets as well as significant capital expenditure in the period from Q1 2011 to Q1 2012 leading to increased DD&A rates, particularly on Beatrice and Jacky (offset by reduced Beatrice and Jacky production). An oil and gas inventory movement of $3.1 million was credited to cost of sales in Q1 2012 (Q1 2011 $0.1 million) primarily arising from differences between barrels produced and sold from the Cook and Broom fields (Cook and Broom oil production is recorded as a credit to movement in oil inventory through cost of sales until oil has been lifted), with more barrels of oil being produced (391k bbls) than sold (379k bbls) in Q1 2012. The remainder of the movement is primarily driven by the change in valuation of the opening inventory barrels due to the increase in Brent oil price from $106.51 at December 31, 2011 to $123.46 at March 31, 2012.Administrative expenses and Exploration & Evaluation expenses Administrative expenses increased in the quarter to $1.2 million (Q1 2011 $1.1 million). The continued growth of the Corporation has resulted in a modest increase in administrative overheads with the majority of the growth being in personnel numbers focused on strengthening the development project teams.Exploration and evaluation expenses of $0.1 million (Q1 2011 $0.8 million) were recorded due to the expensing of previously capitalized costs relating to areas where exploration and evaluation activities have ceased.Foreign exchange and Financial InstrumentsA foreign exchange gain of $1.6 million was recorded in Q1 2012 (Q1 2011 $2.1 million gain). The majority of the Corporation's revenue is US dollar driven whilst costs are primarily incurred in British pounds. As such, general volatility in the USD:GBP exchange rate was the driver behind the foreign exchange gain in Q1 2012 (USD:GBP at January 1, 2012: 1.5546. USD:GBP at March 31, 2011: 1.5990 with fluctuations between 1.5232 and 1.6036 during the period). This volatility was partly offset by foreign exchange hedges as described in the "Risks and Uncertainties" below.The Corporation recorded a $0.7 million loss on financial instruments for the three months ended March 31, 2012 (Q1 2011 $2.3 million loss). The loss was predominantly due to a $1.3 million loss on revaluation of contingent considerations relating to the acquisition of the Stella field and Challenger Minerals (North Sea) Limited ("CMNSL"), partially offset by a net gain of $0.6 million relating to unrealized movements in foreign exchange forward contracts and realized movements in commodity hedges. The unrealized loss on commodity hedges has been recorded through other comprehensive income, having been designated as a hedging instrument.TaxationA deferred tax charge of $0.9 million was recognized in the quarter ended March 31, 2012 (Q1 2011: $8.5 million) representing an effective tax rate of 6%. This rate is a product of adjustments to taxable income primarily relating to the UK Ring Fence Expenditure Supplement and share based payments. No tax is expected to be paid in the mid-term future relating to upstream oil and gas activities.As a result of the above factors, profit after tax increased to $12.9 million (Q1 2011 $3.8 million).SUMMARY OF QUARTERLY RESULTS The following table provides a summary of the quarterly results of the Corporation for the eight most recently completed quarters: Restated31/03/ 2012 $'00031/12/ 201130/09/ 2011 $'00030/06/ 2011 $'00031/03/ 2011 $'00031/12/ 2010 $'00030/09/ 2010 $'00030/06/ 2010 $'000Revenue40.55354.87026,41516,72431,05034,26035,96534,129Profit after tax12,91613,37815,9572,7433,78917,65018,07314,098Earnings per shareBasic0.050.050.060.010.010.070.080.09Diluted0.050.050.060.010.010.070.080.09The most significant factors to have affected the Corporation's results during the above quarters are fluctuation in underlying commodity prices and movement in production volumes. The Corporation has utilized forward sales contracts and foreign exchange contracts to take advantage of higher commodity prices while reducing the exposure to price volatility. These contracts can cause volatility in profit after tax as a result of unrealized gains and losses due to movements in the oil price and USD : GBP exchange rate.Each of the quarters from Q4 2010 to Q3 2011 has been restated following the Corporation's election to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. Refer to the "Changes in Accounting Policies" below for more details.LIQUIDITY AND CAPITAL RESOURCES As at March 31, 2012, Ithaca had working capital of $115.2 million including a free cash balance of $89.9 million. Available cash has been, and is currently, invested in money market deposit accounts with Lloyds Banking Group ("Lloyds"). Management has received confirmation from the financial institution that these funds are available on demand. The restricted cash of $20.7 million comprises $20.3 million currently held by Lloyds as decommissioning security provided as part of the acquisitions of the Anglia and Cook fields (with release / renewal dates of: February 28, 2013 ($10.8 million), and December 31, 2012 ($9.5 million)) and $0.4 million also held by Lloyds as cash security for a bank guarantee provided to the Crown Estate as part of the Field Development Plan approval for the Jacky field (release / renewal date of December 23, 2012).At March 31, 2012, Ithaca has unused credit facilities currently totalling $140 million.During the three months ended March 31, 2012 there was a cash outflow from operating, investing and financing activities of $5.6 million (Q1 2011 outflow of $4.2 million). The net outflow was due to a cash inflow from operating activities of $27.5 million offset by a cash outflow from investing activities of $30.3 million, and a cash outflow from financing activities of $4.2 million. The remainder of the movement was due to foreign exchange on non US Dollar denominated cash deposits. This overall free cash outflow is predominantly the product of development capital expenditure on the Greater Stella Area, offset by cash generated from Beatrice, Jacky, Anglia, Topaz, Cook and Broom operations.A significant proportion of Ithaca's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. The Corporation assesses partners' credit worthiness before entering into joint venture agreements. The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at March 31, 2012 over 99% of the accounts receivable is current, being defined as less than 90 days. In the past, the Corporation has not experienced credit loss in the collection of accounts receivable.The Corporation continues to be fully funded, with more than sufficient financial resources to cover the anticipated level of development capital expenditure commitments and to continue the pursuit of both additional asset acquisition opportunities and licencing round participation through its existing cash balance, forecast cashflow from operations and its undrawn debt facility. No unusual trends or fluctuations are expected outside the ordinary course of business. COMMITMENTS The Corporation has the following financial commitments: 1 year2-5 yearsMore than 5 yearsUS$'000US$'000US$'000Office lease2561,023256Exploration license fees611--Engineering33,84728,188-Rig commitments7,62510,495-Total42,33939,706256The engineering financial commitments relate to pre-development committed capital expenditure on the Stella, Harrier and Hurricane fields, as well as ongoing capital and operating expenditure on existing producing fields. As stated above, these commitments are expected to be funded through the Corporation's existing cash balance, forecast cashflow from operations and its undrawn debt facility.OUTSTANDING SHARE INFORMATION As at March 31, 2012 Ithaca had 259,164,461 common shares outstanding along with 17,906,839 options outstanding to employees and directors to acquire common shares. The total number of options outstanding is inclusive of 400,000 options granted to an officer in the quarter in accordance with the Corporation's stock option plan. Those 400,000 options were approved by the Board of Directors at a price of C$2.31. Each of the options granted may be exercised over a period of four years from the grant date. One third of the options will vest at the end of the first, second and third years from the effective date of grant.As at May 11, 2012, the number of common shares and options outstanding has not changed. CRITICAL ACCOUNTING ESTIMATESCertain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid the reader in assessing the critical accounting policies and practices of the Corporation and the likelihood of materially different results being reported. Ithaca's management reviews these estimates regularly. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates. The following assessment of significant accounting policies and associated estimates is not meant to be exhaustive. The Corporation might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.Capitalized costs relating to the exploration and development of oil and gas reserves, along with estimated future capital expenditures required in order to develop proved and probable reserves are depreciated on a unit-of-production basis, by asset, using estimated proved and probable reserves as adjusted for production. A review is carried out each reporting date for any indication that the carrying value of the Corporation's Development & Production ("D&P") assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the Cash Generating Unit ("CGU"). Each CGU is identified in accordance with IAS 36. The Corporation's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the Statement of Income.Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized in the Statement of Income. Impairment losses relating to goodwill cannot be reversed in future periods.Recognition of decommissioning liabilities associated with oil and gas wells are determined using estimated costs discounted based on the estimated life of the asset. In periods following recognition, the liability and associated asset are adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The liability is accreted up to the actual expected cash outlay to perform the abandonment and reclamation. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. All financial instruments, other than those designated as effective hedging instruments, are initially recognized at fair value on the balance sheet. The Corporation's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument.In order to recognize share based payment expense, the Corporation estimates the fair value of stock options granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields. These assumptions may vary over time. The determination of the Corporation's income and other tax liabilities / assets requires interpretation of complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded on the financial statements.The accrual method of accounting will require management to incorporate certain estimates of revenues, production costs and other costs as at a specific reporting date. In addition, the Corporation must estimate capital expenditures on capital projects that are in progress or recently completed where actual costs have not been received as of the reporting date.OFF-BALANCE SHEET ARRANGEMENTS The Corporation has certain lease agreements and rig commitments which were entered into in the normal course of operations, all of which are disclosed under the heading "Commitments", above. Leases are treated as either operating leases or finance leases based on the extent to which risks and rewards incidental to ownership lie with the lessor or the lessee under IAS 17. No asset or liability value has been assigned to any leases on the balance sheet as at March 31, 2012.RELATED PARTY TRANSACTIONS A director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The amount of fees paid to Burstall Winger LLP in Q1 2012 was $Nil (Q1 2011 - $0.1 million). All related party transactions are in the normal course of business and are conducted on normal commercial terms with consideration comparable to those charged by third parties.RISKS AND UNCERTAINTIES The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There is substantial risk that the manpower and capital employed will not result in the finding of new reserves in economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints, lack of pipeline capacity or lack of markets. The Corporation is dependent upon the production rates and oil price to fund the current development program. In order to mitigate the Corporation's risk to fluctuations in oil price, the Corporation has taken out a number of commodity derivatives. In February 2012, the Corporation entered into two swap options: to sell 268,800 bbls of the Corporation's March 2012 - December 2012 forecast production at a fixed price of $121.32/bbl; and to sell 500,000 bbls of the Corporation's forecast July 2012 - June 2013 production at $113.25 / bbl.The Corporation is exposed to financial risks including financial market volatility, fluctuation in interest rates and various foreign exchange rates. Given the increasing development expenditure and operating costs in currencies other than the United States dollar, the Board of Directors of the Corporation has a hedging policy to mitigate foreign exchange rate risk on committed expenditure. In November 2011, the Corporation entered into a forward extra plus contract with Lloyds to hedge its forecast GBP 2012 operating costs, including general and administrative expenses. The hedge amounts to $4 million per month (total $48 million) at a USD:GBP rate of no worse than $1.60/£1.0 while benefiting in any improvement of the rate down to a trigger rate of $1.40/£1.00. If the trigger rate is reached in any month the conversion rate realized for that month is $1.58/£1.00.A further risk relates to the Corporation's ability to meet the conditions precedent for a full drawdown on the Corporation's credit facility with the Bank of Scotland (the "Credit Facility"). Ability to drawdown the Credit Facility is based on the Corporation meeting certain covenants including coverage ratio tests, liquidity tests and development funding tests which are determined by a detailed economic model of the Corporation. There can be no assurance that the Corporation will satisfy such tests in order to have access to the full amount of the Credit Facility, however at present the Corporation believes that there are no circumstances present that result in failure to meet those tests and can therefore draw down upon its Credit Facility.In addition, the Credit Facility contains the aforementioned covenants that require the Corporation to meet certain financial tests and that restrict, among other things, the ability of Ithaca to incur additional debt or dispose of assets. To the extent the cash flow from operations is ever deemed not adequate to fund Ithaca's cash requirements, external financing may be required. Lack of timely access to such additional financing, or which may not be on favorable terms, could limit the future growth of the business of Ithaca. To the extent that external sources of capital, including public and private markets, become limited or unavailable, Ithaca's ability to make the necessary capital investments to maintain or expand its current business and to make necessary principal payments under the Credit Facility may be impaired. At present the Corporation believes that there are no circumstances present that result in failure to meet those certain financial tests. Access to the full Credit Facility will probably require syndication of the debt, the success of which at the current Credit Facility pricing levels will be influenced by the volatility in European bank liquidity.A failure to access adequate capital to continue its expenditure program may require that the Corporation meet any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development programs. As is standard to a credit facility, the Corporation's and Ithaca Energy (UK) Limited's ("Ithaca UK") assets have been pledged as collateral and are subject to foreclosure in the event the Corporation or Ithaca UK defaults. At present the Corporation believes that there are no circumstances present that would lead to selected divestment, delays to existing programs or a default relating to the Credit Facility.The Corporation is and may in the future be exposed to third-party credit risk through its contractual arrangements with its current and future joint venture partners, marketers of its petroleum production and other parties. The Corporation extends unsecured credit to these parties, and therefore, the collection of any receivables may be affected by changes in the economic environment or other conditions. Management believes the risk is mitigated by the financial position of the parties. All of the Corporation's oil production from the Beatrice, Jacky, and forthcoming Athena fields is sold to BP Oil International Limited. Oil production from Cook and Broom is sold to Shell Trading International Ltd. Anglia and Topaz gas production is currently sold through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd. and Esso Exploration & Production UK Ltd. The Corporation has not experienced any material credit loss in the collection of accounts receivable to date.The Corporation's properties will be generally held in the form of licenses, concessions, permits and regulatory consents ("Authorizations"). The Corporation's activities are dependent upon the grant and maintenance of appropriate Authorizations, which may not be granted; may be made subject to limitations which, if not met, will result in the termination or withdrawal of the Authorization; or may be otherwise withdrawn. Also, in the majority of its licenses, the Corporation is often a joint interest-holder with another third party over which it has no control. An Authorization may be revoked by the relevant regulatory authority if the other interest-holder is no longer deemed to be financially credible. There can be no assurance that any of the obligations required to maintain each Authorization will be met. Although the Corporation believes that the Authorizations will be renewed following expiry or granted (as the case may be), there can be no assurance that such Authorizations will be renewed or granted or as to the terms of such renewals or grants. The termination or expiration of the Corporation's Authorizations may have a material adverse effect on the Corporation's results of operations and business.In addition, the areas covered by the Authorizations are or may be subject to agreements with the proprietors of the land. If such agreements are terminated, found void or otherwise challenged, the Corporation may suffer significant damage through the loss of opportunity to identify and extract oil or gas.The Corporation is also subject to the risks associated with owning oil and natural gas properties, including environmental risks associated with air, land and water. The Corporation takes out market insurance to mitigate many of these operational, construction and environmental risks. In all areas of the Corporation's business there is competition with entities that may have greater technical and financial resources. There are numerous uncertainties in estimating the Corporation's reserve base due to the complexities in estimating the magnitude and timing of future production, revenue, expenses and capital. All of the Corporation's operations are conducted offshore in the UKCS; as such Ithaca is exposed to operational risk associated with weather delays that can result in a material delay in project execution. Third parties operate some of the assets in which the Corporation has interests. As a result, the Corporation may have limited ability to exercise influence over the operations of these assets and their associated costs. The success and timing of these activities may be outside the Corporation's control.For additional detail regarding the Corporation's risks and uncertainties, refer to the Corporation's most recent AIF filed on SEDAR at www.sedar.com.CONTROL ENVIRONMENT Ithaca has established disclosure controls, procedures and corporate policies so that its consolidated financial results are presented accurately, fairly and on a timely basis. The Chief Executive Officer and Chief Financial Officer have designed, or have caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company's financial statements in accordance with IFRS with no material weaknesses identified.Based on their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements and even those options determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.As of March 31, 2012, there were no changes in our internal control over financial reporting that occurred during the period ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. CHANGES IN ACCOUNTING POLICIES On January 1, 2011, the Corporation adopted IFRS using a transition date of January 1, 2010. The financial statements for the three months ended March 31, 2012, including required comparative information, have been prepared in accordance with IFRS and with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). Following the introduction of IFRS the Corporation initially accounted for the acquisitions of the non-operated interests in the Cook field and of CMNSL as asset acquisitions. In Q4 2011 the Company subsequently elected to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. This has resulted in a restatement of the original accounting for the Cook acquisition (in Q3 2011) and the acquisition of gas assets from GDF (in Q4 2010) as shown in previous interim statements during 2011.One impact of accounting for acquisitions as business combinations is the recognition of asset values, upon which the DD&A rate is calculated as pre-tax fair values and the recognition of a deferred tax liability on estimated future cash flows. With current tax rates at 62% this increases the DD&A charge for such assets. A partially offsetting reduction is recognized in the deferred tax charged through the consolidated statement of income. IMPACT OF FUTURE ACCOUNTING CHANGESIn May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Corporation has not yet assessed the impact that the new and amended standards will have on its financial statements or whether to early adopt any of the new requirements.FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS All financial instruments, other than those designated as effective hedging instruments, are initially measured in the balance sheet at fair value. Subsequent measurement of the financial instruments is based on their classification. The Corporation has classified each financial instrument into one of these categories: held-for-trading, held-to-maturity investments, loans and receivables, or other financial liabilities. Loans and receivables, held-to-maturity investments and other financial liabilities are measured at amortized cost using the effective interest rate method. For all financial assets and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair value initially recognized for that financial instrument. These costs are expensed using the effective interest rate method and are recorded within interest expense. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income.All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the expected purchase, sale and usage exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income until the hedged transaction is recognized in net earnings.The Corporation has classified its cash and cash equivalents, restricted cash, derivatives, commodity hedge and long term liability as held-for-trading, which are measured at fair value with changes being recognized in net income. Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and accrued liabilities are classified as other liabilities, all of which are measured at amortized cost. The classification of all financial instruments is the same at inception and at March 31, 2012. The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of comprehensive income:Three months ended March 3120122011US$'000US$'000Unrealized gain on forex forward contracts969-Revaluation of gas contract(114)(197)Revaluation of other long term liability(90)114Unrealized (loss) on commodity hedges-(1,711)Total unrealized gain / (loss)765(1,794)Realized (loss) on commodity hedges(199)(493)Total realized / unrealized gain / (loss)566(2,287)Contingent consideration(1,294)2,000Total (loss) on financial instruments(728)(287)The contingent consideration of $2 million relating to the relinquishment of Opal and Garnet prospects in Q1 2011 was released to the Statement of Income through E&E expense. An unrealized loss of $1.0 million on commodity hedges has been recorded through other comprehensive income in Q1 2012, having been designated as a hedging instrument.FORWARD-LOOKING INFORMATIONThis MD&A and any documents incorporated by reference herein contain certain forward-looking statements and forward-looking information which are based on the Corporation's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, future capital expenditures and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could", "scheduled", "targeted" and similar expressions are intended to identify forward-looking statements and forward-looking information. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements or information. The Corporation believes that the expectations reflected in those forward-looking statements and information are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and information included in this MD&A and any documents incorporated by reference herein should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of this MD&A and any documents incorporated by reference herein and the Corporation does not undertake any obligation to publicly update or revise any forward-looking statements or information, except as required by applicable laws.In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking statements and information pertaining to the following: the quality of and future net revenues from the Corporation's reserves; oil, natural gas liquids ("NGLs") and natural gas production levels; commodity prices, foreign currency exchange rates and interest rates; capital expenditure programs and other expenditures; the sale, farming in, farming out or development of certain exploration properties using third party resources; supply and demand for oil, NGLs and natural gas; the Corporation's ability to raise capital; the Corporation's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom; the Corporation's ability to continually add to reserves; schedules and timing of certain projects and the Corporation's strategy for growth; the Corporation's future operating and financial results; the ability of the Corporation to optimize operations and reduce operational expenditures; treatment under governmental and other regulatory regimes and tax, environmental and other laws; production rates; targeted production levels; and timing and cost of the development of the Corporation's reserves. With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference herein, the Corporation has made assumptions regarding, among other things:Ithaca's ability to obtain additional drilling rigs and other equipment in a timely manner, as required; Access to third party hosts and associated pipelines can be negotiated and accessed within the expected timeframe; Field development plan approval and operational construction and development is obtained within expected timeframes; The Corporation's development plan for the Stella and Harrier discoveries will be implemented as planned; Reserves volumes assigned to Ithaca's properties; Ability to recover reserves volumes assigned to Ithaca's properties; Revenues do not decrease below anticipated levels and operating costs do not increase significantly above anticipated levels; future oil, NGLs and natural gas production levels from Ithaca's properties and the prices obtained from the sales of such production; the level of future capital expenditure required to exploit and develop reserves; Ithaca's ability to obtain financing on acceptable terms, in particular, the Corporation's ability to access the Credit Facility; Ithaca's reliance on partners and their ability to meet commitments under relevant agreements; and the state of the debt and equity markets in the current economic environment. The Corporation's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of assumptions proving inaccurate and of both known and unknown risks, including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the documents incorporated by reference herein, and those set forth below:risks associated with the exploration for and development of oil and natural gas reserves in the North Sea; risks associated with offshore development and production including transport facilities; operational risks and liabilities that are not covered by insurance; volatility in market prices for oil, NGLs and natural gas; the ability of the Corporation to fund its substantial capital requirements and operations; risks associated with ensuring title to the Corporation's properties; changes in environmental, health and safety or other legislation applicable to the Corporation's operations, and the Corporation's ability to comply with current and future environmental, health and safety and other laws; the accuracy of oil and gas reserve estimates and estimated production levels as they are affected by the Corporation's exploration and development drilling and estimated decline rates; the Corporation's success at acquisition, exploration, exploitation and development of reserves; the Corporation's reliance on key operational and management personnel; the ability of the Corporation to obtain and maintain all of its required permits and licenses; competition for, among other things, capital, drilling equipment, acquisitions of reserves, undeveloped lands and skilled personnel; changes in general economic, market and business conditions in Canada, North America, the United Kingdom, Europe and worldwide, specifically being the unavailability of the debt and equity markets to the Corporation during the current economic crisis; actions by governmental or regulatory authorities including changes in income tax laws or changes in tax laws, royalty rates and incentive programs relating to the oil and gas industry including the recent increase in UK taxes; adverse regulatory rulings, orders and decisions; and risks associated with the nature of the common shares. Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future. Many of these risk factors, other specific risks, uncertainties and material assumptions are discussed in further detail throughout the AIF and in the MD&A. Readers are specifically referred to the risk factors described in the AIF under "Risk Factors" and in other documents the Corporation files from time to time with securities regulatory authorities. Copies of these documents are available without charge from Ithaca or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com.Consolidated Statement of IncomeFor the three months ended 31 March 2012 and 2011(unaudited)Note2012 US$'000Restated2011 US$'000Revenue440,55331,050Cost of Sales6(26,006)(17,666)Gross Profit14,54713,384Exploration and evaluation expenses9(75)209Administrative expenses5(1,206)(1,060)Operating Profit13,26612,533Foreign exchange1,6482,134(Loss) on financial instruments21(728)(2,287)Profit on ordinary activities Before Interest and Tax14,18612,380Finance costs(469)(260)Interest income65157Profit Before Tax13,78212,278Taxation - Deferred tax19(866)(8,490)Profit After Tax12,9163,788Earnings per shareBasic180.050.01Diluted180.050.01The accompanying notes on pages 7 to 24 are an integral part of the financial statements.Consolidated Statement of Comprehensive IncomeFor the three months ended 31 March 2012 and 2011(unaudited)Note2012 US$'000Restated2011 US$'000Profit for the period12,9163,788Net (loss) on oil price hedge22(376)-Other comprehensive income(376)-Total comprehensive income12,5403,788The accompanying notes on pages 7 to 24 are an integral part of the financial statements. Consolidated Statement of Financial Position(unaudited)31 March 2012 US$'00031 December 2011 US$'000ASSETSCurrent assetsCash and cash equivalents89,94495,545Restricted cash720,67716,510Accounts receivable81,83480,960Deposits, prepaid expenses and other8,7348,793Inventory811,9348,836Derivative financial instruments22459-213,582210,644Non current assetsExploration and evaluation assets923,86822,689Property, plant & equipment10583,536570,356Goodwill11985985608,389594,030Total assets821,971804,675LIABILITIES AND EQUITYCurrent liabilitiesTrade and other payables98,371102,136Contingent consideration1520,874-119,245102,136Non current liabilitiesDecommissioning liabilities1344,76439,382Other long term liabilities142,8762,785Contingent consideration155,00024,580Derivative financial instruments222,4861,846Deferred tax liability19126,787126,534181,913195,127Net assets520,813507,411Shareholders' equityShare capital16429,502429,502Share based payment reserve1718,18017,318Warrants issued16--Retained earnings73,50760,591Other comprehensive income(376)-Shareholders' equity520,813507,411"John Summers"Director"Iain McKendrick" Director The accompanying notes on pages 7 to 24 are an integral part of the financial statements. Consolidated Statement of Changes in Equity (unaudited)Share Capital US$'000Share based Payment Reserve US$'000Warrants Issued US$'000Retained E'ings US$'000Other Comp. Income US$'000Total US$'000Balance, 1 Jan 2011422,37311,42731124,997-459,108Share based payment-1,585---1,585Options exercised347(148)---199Warrants exercised6,097-(311)--5,786Net income for the year---3,788-3,788Balance, 31 March 2011428,81712,864-28,785-470,466Balance, 1 Jan 2012429,50217,318-60,591-507,411Share based payment-862---862Options exercised------Warrants exercised------Unrealised hedging loss----(376)(376)Net income for the year---12,916-12,916Balance, 31 March 2012429,50218,180-73,507(376)520,813The accompanying notes on pages 7 to 24 are an integral part of the financial statements. Consolidated Statement of Cash Flow For the three months ended 31 March 2012 and 2011 (unaudited)Note2012 US$'0002011 US$'000Operating activitiesProfit Before Tax13,78212,278Adjustments for:Depletion, depreciation and amortisation1013,3857,420Exploration and evaluation expenses9751,791Share based compensation5135591Loan fee amortisation7878Unrealised (gain) / loss on financial instruments21(765)1,794Revaluation of contingent consideration151,294(2,000)Accretion384178Cashflow from operations28,36822,130Changes in inventory, debtors and creditors relating to operating activities(820)5,629Net cash from operating activities27,54827,759Investing activitiesCapital expenditureOil and gas assets(22,482)(23,781)Non oil and gas assets(26)(382)Changes in debtors and creditors relating to investing activities(7,810)(9,173)Net cash (used in) investing activities(30,318)(33,336)Financing activitiesProceeds from issuance of shares-5,986(Increase) in restricted cash(4,167)(1,287)Derivatives-(4,063)Net cash from / (used in) financing activities(4,167)636Currency translation differences relating to cash and cash equivalents1,336694(Decrease) in cash and cash equivalents(5,601)(4,247)Cash and cash equivalents, beginning of period95,545195,581Cash and cash equivalents, end of period89,944191,334The accompanying notes on pages 7 to 24 are an integral part of the financial statements. 1. NATURE OF OPERATIONSIthaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated and domiciled in Alberta, Canada on 27 April 2004, is a publicly traded company involved in the exploration, development and production of oil and gas in the North Sea. The Corporation's registered office is 1600, 333 - 7th Avenue S.W., Calgary, Alberta, Canada, T2P 2Z1. As of 1 November 2011 the Corporation's shares have traded on the Toronto Stock Exchange in Canada (previously the TSX Venture Exchange). The Corporation's shares continue to trade on the London Stock Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE". Ithaca has two wholly-owned subsidiaries, Ithaca Energy (UK) Limited ("Ithaca UK") and Ithaca Minerals (North Sea) Ltd ("Ithaca Minerals"), which was acquired on 19 October 2011, both incorporated in Scotland. Ithaca also has one associate, FPU Services Limited ("FPU Services"), incorporated in Jersey. 2. BASIS OF PREPARATIONThese interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) applicable to the preparation of interim financial statements, including IAS 34 Interim Financial Reporting. These interim consolidated financial statements do not include all the necessary annual disclosures in accordance with IFRS.The Company has elected to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. This has resulted in a restatement of the acquisition of gas assets from GDF (in 4Q 2010) as shown in previous interim statements during 2011. The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and outstanding as of 11 May 2012, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Corporation's annual consolidated financial statements for the year ending 31 December 2012 could result in restatement of these interim consolidated financial statements. The condensed interim consolidated financial statements should be read in conjunction with the Corporation's annual financial statements for the year ended 31 December 2011. 3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTYBasis of measurementThe consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments. Basis of consolidation The consolidated financial statements of the Corporation include the accounts of Ithaca Energy Inc. and the wholly-owned subsidiaries Ithaca Energy (UK) Ltd and Ithaca Minerals (North Sea) Ltd. All inter-company transactions and balances have been eliminated on consolidation.A subsidiary is an entity (including special purpose entities) which the Corporation controls by having the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Ithaca controls another entity. A subsidiary is fully consolidated from the date on which control is obtained by Ithaca and is de-consolidated from the date that control ceases. Business Combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of completion of the acquisition. Acquisition costs incurred are expensed and included in administrative expenses. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Corporation's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the Corporation's share of the net assets required, the difference is recognised directly in the statement of income. Goodwill Capitalisation Goodwill acquired through business combinations is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised as the fair value of the Corporation's share of the identifiable net assets acquired and liabilities assumed. If this consideration is lower than the fair value of the identifiable assets acquired, the difference is recognised in the statement of income. Impairment Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit ("CGU") to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the statement of income. Impairment losses relating to goodwill cannot be reversed in future periods. Foreign Currency Translation Items included in the financial statements are measured using the currency of the primary economic environment in which the Corporation and its subsidiary operate (the 'functional currency'). The consolidated financial statements are presented in United States Dollars, which is the Corporation's functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income. Share based payments The Corporation has a share based payment plan as described in note 16 (c). The Corporation's proportionate share of expense is recorded in the statement of income or capitalised for all options granted in the year, with the gross increase recorded in the share based payment reserve. Compensation costs are based on the estimated fair values at the time of the grant and the expense or capitalised amount is recognised over the vesting period of the options. Upon the exercise of the stock options, consideration paid together with the amount previously recognised in the share based payment reserve is recorded as an increase in share capital. In the event that vested options expire unexercised, previously recognised compensation expense associated with such stock options is not reversed. In the event that unvested options are forfeited or expired, previously recognised compensation expense associated with the unvested portion of such stock options is reversed. Cash and Cash Equivalents For the purpose of cash flow statements, cash and cash equivalents include investments with an original maturity of three months or less.Restricted Cash Cash that is held for security for bank guarantees is reported in the balance sheet and cash flow statements separately. If the expected duration of the restriction is less than twelve months then it is shown in current assets. Financial Instruments All financial instruments, other than those designated as effective hedging instruments, are initially recognised at fair value in the statement of financial position. The Corporation's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities, contingent consideration and the long term liability on the Beatrice acquisition. The Corporation classifies its financial instruments into one of the following categories: held-for-trading financial assets and financial liabilities; held-to-maturity investments; loans and receivables; and other financial liabilities. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument. Held-for-trading financial instruments are subsequently measured at fair value with changes in fair value recognised in net earnings. All other categories of financial instruments are measured at amortised cost using the effective interest method. Cash and cash equivalents are classified as held-for-trading and are measured at fair value. Accounts receivable are classified as loans and receivables. Accounts payable, accrued liabilities, certain other long-term liabilities, and long-term debt are classified as other financial liabilities. Although the Corporation does not intend to trade its derivative financial instruments, they are classified as held-for-trading for accounting purposes. Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability and original issue discounts on long-term debt have been included in the carrying value of the related financial asset or liability and are amortised to consolidated net earnings over the life of the financial instrument using the effective interest method. The Corporation may designate financial instruments as a hedging instrument for accounting purposes. Hedge accounting requires the designation of a hedging relationship, including a hedged and a hedging item, identification of the risk exposure being hedged and an expectation that the hedging relationship will be highly effective throughout its term. The Corporation assesses, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments designated as hedges are highly effective in offsetting changes in cash flows of the hedged items. The effective portion of the gains and losses on cash flow hedges is recorded in Other Comprehensive Income until the hedged transaction is recognised in net earnings. Any hedge ineffectiveness is immediately recognised in net earnings. When the hedged transaction is recognised in net earnings, the fair value of the associated cash flow hedging item is reclassified from other reserves into net earnings. Hedge accounting is discontinued on a prospective basis when the hedging relationship no longer qualifies for hedge accounting. Analysis of the fair values of financial instruments and further details as to how they are measured are provided in notes 21 to 23. Inventory Inventories of materials and product inventory supplies, other than oil and gas inventories, are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out method. Oil and gas inventories are stated at fair value less cost to sell. Property, Plant and Equipment Oil and gas expenditure - exploration and evaluation assets Capitalisation Pre-acquisition costs on oil and gas assets are recognised in the statement of income when incurred. Costs incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and commercial appraisal costs and other directly attributable costs of exploration and evaluation including technical and administrative costs are capitalised as intangible exploration and evaluation ("E&E") assets.E&E costs are not amortised prior to the conclusion of evaluation activities. At completion of evaluation activities, if technical feasibility is demonstrated and commercial reserves are discovered then, following development sanction, the carrying value of the E&E asset is reclassified as a development and production ("D&P") asset, but only after the carrying value is assessed for impairment and where appropriate its carrying value adjusted. If after completion of evaluation activities in an area, it is not possible to determine technical feasibility and commercial viability or if the legal right to explore expires or if the Corporation decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration and evaluation is written off to the statement of income in the period the relevant events occur. Impairment The Corporation's oil and gas assets are analysed into cash generating units ("CGU") for impairment review purposes, with E&E asset impairment testing being performed at a grouped CGU level. The current E&E CGU consists of the Corporation's whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate that the carrying value of an E&E asset exceeds the recoverable amount. When reviewing E&E assets for impairment, the combined carrying value of the grouped CGU is compared with the grouped CGU's recoverable amount. The recoverable amount of a grouped CGU is determined as the higher of its fair value less costs to sell and value in use. Impairment losses resulting from an impairment review are written off to the Income Statement. Oil and gas expenditure - development and production assets Capitalisation Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset. Normally each individual field development will form an individual D&P asset but there may be cases, such as phased developments, or multiple fields around a single production facility when fields are grouped together to form a single D&P asset. Depreciation All costs relating to a development are accumulated and not depreciated until the commencement of production. Depreciation is calculated on a unit of production basis based on the proved and probable reserves of the asset. Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant and equipment will normally be fully depreciated over the life of the field. However, these items are assessed to consider if their useful lives differ from the expected life of the D&P asset and should this occur a different depreciation rate would be charged. Impairment A review is carried out each reporting date for any indication that the carrying value of the Corporation's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the CGU. Each CGU is identified in accordance with IAS 36. The Corporation's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the statement of income. (b) Non Oil and Natural Gas Operations Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straight-line basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated useful lives on a straight-line basis over five years. Decommissioning liabilities The Corporation records the present value of legal obligations associated with the retirement of long term tangible assets, such as producing well sites and processing plants, in the period in which they are incurred with a corresponding increase in the carrying amount of the related long term asset. The obligation generally arises when the asset is installed or the ground/environment is disturbed at the field location. In subsequent periods, the asset is adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. Contingent considerationContingent consideration is accounted for as a financial liability and measured at fair value at the date of acquisition with any subsequent remeasurements recognised either in the statement of income or in other comprehensive income in accordance with IAS 39. Taxation Current income taxCurrent income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are those that are enacted or substantively enacted by the reporting date. Deferred income taxDeferred tax is recognised for all deductible temporary differences and the carry-forward of unused tax losses. Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in rates is included in earnings in the period of the enactment date. Deferred tax assets are recorded in the consolidated financial statements if realisation is considered more likely than not. Recent accounting pronouncements In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Corporation has not yet assessed the impact that the new and amended standards will have on its financial statements or whether to early adopt any of the new requirements. Significant accounting judgements and estimation uncertainties The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made based on unsettled transactions and other events and a precise determination of many assets and liabilities is dependent upon future events. Actual results may differ from estimated amounts. The amounts recorded for depletion, depreciation of property and equipment, long-term liability, stock-based compensation, contingent consideration, decommissioning liabilities, derivatives, warrants, and deferred taxes are based on estimates. The depreciation charge and any impairment tests are based on estimates of proved and probable reserves, production rates, prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material. 4. REVENUE Three months ended 31 March2012 US$'0002011 US$'000Oil sales35,80825,133Gas sales2,8213,922Condensate sales170321Other income1,7541,674Total40,55331,0505. ADMINISTRAVTIVE EXPENSES Three months ended 31 March2012 US$'0002011 US$'000General & administrative(1,071)(469)Share based payments(135)(591)(1,206)(1,060)6. COST OF SALES RestatedThree months ended 31 March2012 US$'0002011 US$'000Operating costs(15,721)(10,316)Movement in oil and gas inventory3,10070Depletion, Depreciation and Amortisation(13,385)(7,420)(26,006)(17,666)7. RESTRICTED CASH 31 March 2012 US$'00031 Dec 2011 US$'000Decommissioning security20,32616,167Other security35134320,67716,510Restricted cash of $20.3 million is held by Lloyds as decommissioning security in respect of the Corporation's interests in the Anglia and Cook fields with release dates of 28 February 2013 ($10.8 million) and 31 December 2012 ($9.5 million). Further restricted cash of $0.4 million is held by Lloyds as cash security for lease payments to the Crown Estate on the Jacky field (release date of 23 December 2012). 8. INVENTORY 31 March 2012 US$'00031 Dec 2011 US$'000Crude oil inventory11,9208,823Materials inventory141311,9348,8369. EXPLOTATION AND EVALUATION ASSETS US$'000At 1 January 201117,832Additions7,752Write offs/relinquishments(2,791)Disposals(104)At 31 December 201122,689Additions1,254Write offs/relinquishments(75)At 31 March 201223,868Following completion of geotechnical evaluation activity, certain licences were declared unsuccessful and certain prospects were declared non-commercial and therefore the related expenditures of $0.1 million were expensed in the three months to 31 March 2012. $1.8 million of E&E write offs was expensed in the three months ended 31 March 2011. $2 million of associated contingent consideration relating to the licences and prospects relinquished was also released to the consolidated statement of income in Q1 2011. The above reflects 2011 business combination restatements in accordance with IFRS 3®. Refer to note 2 for further details.10. PROPERY, PLANT AND EQUIPMENT Development & Production Oil and Gas Assets US$'000Other fixed assets US$'000Total US$'000CostAt 1 January 2011281,4111,587282,998Additions342,138705342,843At 31 December 2011623,5492,292625,841Additions26,5392626,565At 31 March 2012650,0882,318652,406DD&AAt 1 January 2011(22,934)(1,104)(24,038)Charge for the period(31,054)(393)(31,447)At 31 December 2011(53,988)(1,497)(55,485)Charge for the Quarter(13,285)(100)(13,385)At 31 March 2012(67,273)(1,597)(68,870)NBV at 1 January 2011258,477483258,960NBV at 1 January 2012569,560795570,356NBV at 31 March 2012582,815721583,536The above reflects 2011 business combination restatements in accordance with IFRS 3®. refer to note 2 for further details. 11. GOODWILL US$'000CostAt 1 January 2011, 31 December 2011 & 31 March 2012985$1.0 million represents goodwill recognized on the acquisition of gas assets from GDF in December 2010. 12. LOAN FACILITY On 12 July 2010, the Corporation signed and completed a Senior Secured Borrowing Base Facility agreement (the "Facility") for up to US$140 million with the Bank of Scotland Plc. The loan term is up to five years. The main facility attracts interest of LIBOR plus 2-3.5% and a cost over run facility will attract interest at LIBOR plus 4.5%. Loan issue costs of $0.9 million were incurred in the year ended 31 December 2010 and are being amortised over the period of the loan. The Corporation is subject to financial and operating covenants related to the Facility. Failure to meet the terms of one or more of these covenants may constitute an event of default as defined in the Facility agreement, potentially resulting in accelerated repayment of the debt obligations. Security provided against the loan Security provided against the loan is in the form of a floating charge over all assets. The Corporation is in compliance with its financial and operating covenants. No funds are currently drawn down under the Facility. 13. DECOMMISSIONING LIABILITIES 31 March 2012 US$'00031 Dec 2011 US$'000Balance, beginning of period39,38223,652Additions4,99815,250Accretion384858Revision to estimates-(20)Utilisation-(358)Balance, end of period44,76439,382The total future decommissioning liability was calculated by management based on its net ownership interest in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. The Corporation uses a risk free rate of 3.9 percent (31 December 2011: 3.9 percent) and an inflation rate of 2 percent (31 December 2011: 2 percent) over the varying lives of the assets to calculate the present value of the decommissioning liabilities. These costs are expected to be incurred at various intervals over the next 15 years. The economic life and the timing of the obligations are dependent on Government legislation, commodity price and the future production profiles of the respective production and development facilities. Note that upon the acquisition of the Beatrice Field in November 2008, the Corporation did not assume the decommissioning liabilities.14. OTHER LONG TERM LIABILITIES 31 March 2012 US$'00031 Dec 2011 US$'000Balance, beginning of period2,7852,872Revaluation in the period91(87)Balance, end of period2,8762,785On completion of the acquisition of the Beatrice Facilities on 10 November 2008 there were 75,000 barrels of oil in an oil storage tank at the Nigg Terminal. This volume of oil is required to be in the storage tank when the Beatrice Facilities are retransferred. This volume of oil is valued at the price on the forward oil price curve at the expected date of re-transfer and discounted. The liability is subject to revaluation at each financial period end. The expected date of re-transfer is likely to be more than three years in the future. 15. CONTINGENT CONSIDERATION 31 March 2012 US$'00031 Dec 2011 US$'000Balance, beginning of period24,58012,976Additions-13,604Revision to estimates1,294(2,000)Balance, end of period25,87424,580The contingent consideration at the end of the period relates to the acquisitions of the Stella field and Challenger Minerals (North Sea) Limited. Of the total consideration, $20.9 million is payable upon approval of the Stella Field Development Plan (FDP) and $5.0 million is payable upon first oil. Following receipt of FDP approval in April 2012, $20.9 million consideration is now payable and expected to be paid later in Q2. 16. SHARE CAPITAL Authorised share capitalNo. of ordinary 000Amount US$'000At 31 December 2011 and 31 March 2012Unlimited-(a) IssuedThe issued share capital is as follows:IssuedNumber of common sharesAmount US$'000Balance 1 January 2011255,789,464422,373Issued for cash - options exercised874,997572Issued for cash - warrants exercised2,500,0005,786Transfer from Share based payment reserve on options exercised-460Transfer from Warrants issued on warrants exercised-311Balance 1 January 2012259,164,461429,502Balance 31 March 2012259,164,461429,502(b) Stock options In the quarter ended 31 March 2012, the Corporation's Board of Directors granted 400,000 options at a weighted average exercise price of $2.28 (C$2.31). The Corporation's stock options and exercise prices are denominated in Canadian Dollars when granted. As at 31 March 2012, 17,906,839 stock options to purchase common shares were outstanding, having an exercise price range of $0.20 to $3.65 (C$0.25 to C$3.65) per share and a vesting period of up to 3 years in the future. Changes to the Corporation's stock options are summarised as follows:31 March 201231 December 2011 No. of OptionsWt. Avg Exercise Price*No. of OptionsWt. Avg Exercise Price*Balance, beginning of period17,506,839$1.6620,146,003$1.61Granted400,000$2.28260,000$1.99Forfeited / expired--(2,024,167)$2.29Exercised--(874,997)$0.61Options17,906,839$1.7417,506,839$1.66* The weighted average exercise price has been converted into U.S. dollars based on the foreign exchange rate in effect at the date of issuance. The following is a summary of stock options as at 31 March 2012.Options OutstandingOptions ExercisableRange of Exercise PriceNo. of OptionsWt. Avg Life (Years)Wt. Avg Exercise Price*Range of Exercise Price No. of OptionsWt. Avg Life (Years)Wt. Avg Exercise Price*$3.65 (C$3.65) $2.22-$2.702,165,0000.1$3.65$3.65 (C$3.65)2,165,0000.1$3.65(C$2.25-C$2.69) $1.49-$1.795,450,0002.8$2.23$2.22-$2.70 (C$2.25-C$2.69)1,683,3302.7$2.23(C$1.54-C$1.85) $0.20-$0.815,311,6671.8$1.55$1.49-$1.79 (C$1.54-C$1.85)3,460,0031.7$1.54(C$0.25-C$0.87)4,980,1721.5$0.56$0.20-$0.81 (C$0.25-C$0.87)3,904,5481.6$0.4917,906,8391.8$1.7411,212,8811.5$1.69The following is a summary of stock options as at 31 December 2011.Options OutstandingOptions ExercisableRange of Exercise PriceNo. of OptionsWt. Avg Life (Years)Wt. Avg Exercise Price*Range of Exercise Price No. of OptionsWt. Avg Life (Years)Wt. Avg Exercise Price*$3.65 (C$3.65)$2.22-$2.702,165,0000.1$3.65$3.65 (C$3.65)2,165,0000.1$3.65(C$2.25-C$2.69)$1.49-$1.795,050,0003.0$2.23$2.22-$2.86 (C$2.25-C$2.70)1,663,3303.0$2.22(C$1.54-C$1.85)$0.20-$0.815,311,6672.0$1.55$1.49-$1.79 (C$1.54-C$1.85)2,048,3291.8$1.57(C$0.25-C$0.87)4,980,1721.8$0.56$0.20-$0.81 (C$0.25-C$0.87)3,904,5481.8$0.4917,506,8390.5$1.729,781,2071.6$1.71(c) Share based payments Options granted are accounted for using the fair value method. The cost during the three months ended 31 March 2012 for total stock options granted was $0.9 million (Q1 2011: $1.6 million). $0.1 million was charged through the statement of income for stock based compensation for the three months ended 31 March 2012, being the Corporation's share of stock based compensation chargeable through the statement of income. The remainder of the Corporation's share of stock based compensation has been capitalised. The fair value of each stock option granted was estimated at the date of grant, using the Black-Scholes option pricing model with the following assumptions:For the three months ended 31 March 2012For the year ended 31 December 2011Risk free interest rate0.50%1.20%Expected stock volatility81%97%Expected life of options3 years3 yearsWeighted Average Fair Value$1.23$1.68(d) Gemini Agreement In September 2006 Gemini Oil & Gas Fund 11 L.P. ("Gemini") provided non-recourse funding of $6 million. Further to a supplemental agreement entered into in August 2008, the loan was fully repaid. Under the supplemental agreement Gemini retained rights, under certain circumstances relating to the Athena Field, to elect to receive warrants to acquire up to 3,000,000 common shares at $3.00 per share and to receive payments connected to asset sales of interests in Athena. On 20 September 2010, a further agreement was entered into with Gemini whereby in exchange for and in consideration of Gemini's waiver of any right to proceeds from the disposal of equity interest in the Athena discovery and in substitution for any previously awarded or agreed warrants, Ithaca Energy Inc. granted Gemini warrants to acquire up to 2,500,000 common shares in Ithaca Energy Inc. The warrants were exercised at C$2.25 per share on 3 March 2011. The agreement terminates all rights that Gemini has in respect of the Corporation's interests. The total fair value attributed to warrants issued in 2010 was $0.3 million.17. SHARE BASED PAYMENT RESERVE31 March 2012 US$'00031 Dec 2011 US$'000Balance, beginning of period17,31811,427Share based payment cost8626,351Transfer to share capital on exercise of options-(460)Balance, end of period18,18017,31818. EARNINGS PER SHRE The calculation of basic earnings per share is based on the profit after tax and the weighted average number of common shares in issue during the period. The calculation of diluted earnings per share is based on the profit after tax and the weighted average number of potential common shares in issue during the period. Three months ended 31 March20122011Weighted average number of common shares (basic)259,164,461256,839,092Weighted average numbers of common shares (diluted)265,009,444262,744,37019. TAXATIONRestatedThree months ended 31 March2012 US$'0002011 US$'000Deferred tax2528,490Deferred tax includes the tax effect of $614k on the loss of oil price hedging shown through the Statement of Other Comprehensive Income.The above reflects 2011 business combination restatements in accordance with IFRS 3®. Refer to note 2 for further details20. COMMENTS Operating lease commitments31 March 2012 US$'00031 Dec 2011 US$'000Within one year256247Two to five years1,023989More than five years256309Capital commitments31 March 2012 US$'00031 Dec 2011 US$'000Capital commitments incurred jointly with other ventures (Ithaca's share)80,76682,52121. FINANCIAL INSTRUMENTS To estimate fair value of financial instruments, the Corporation uses quoted market prices when available, or industry accepted third-party models and valuation methodologies that utilise observable market data. In addition to market information, the Corporation incorporates transaction specific details that market participants would utilise in a fair value measurement, including the impact of non-performance risk. The Corporation characterises inputs used in determining fair value using a hierarchy that prioritises inputs depending on the degree to which they are observable. However, these fair value estimates may not necessarily be indicative of the amounts that could be realised or settled in a current market transaction. The three levels of the fair value hierarchy are as follows: Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, market interest rates, and volatility factors, which can be observed or corroborated in the marketplace. The Corporation obtains information from sources such as the New York Mercantile Exchange and independent price publications. Level 3 - inputs that are less observable, unavailable or where the observable data does not support the majority of the instrument's fair value. In forming estimates, the Corporation utilises the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorised based upon the lowest level of input that is significant to the fair value measurement. The valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorised as Level 2. The following table presents the Corporation's material financial instruments measured at fair value for each hierarchy level as of 31 March 2012: Level 1 US$'000Level 2 US$'000Level 3 US$'000Total fair Value US$'000Derivative financial instrument asset-459-459Long term liability on Beatrice acquisition--(2,876)(2,876)Contingent consideration-(25,874)-(25,874)Derivative financial instrument liability-(2,486)-(2,486)The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of net and comprehensive income / (loss):Three months ended 31 March2012 US$'0002011 US$'000Unrealised gain on foreign exchange forward contracts969-Revaluation of gas contract(114)(197)Revaluation of other long term liability(90)114Unrealised (loss) on commodity hedges-(1,711)765(1,794)Realised (loss) on commodity hedges(199)(493)Total realised/unrealised gain / (loss)566(2,287)Contingent consideration(1,294)2,000Total (loss) on financial instruments(728)(287)The Corporation has identified that it is exposed principally to these areas of market risk. i) Commodity Risk The table below presents the total (loss) / gain on commodity hedges that has been disclosed through the statement of net and comprehensive income: Three months ended 31 March2012 US$'0002011 US$'000Unrealised (loss) on commodity hedges-(1,711)Realised (loss) on commodity hedges(199)(493)Total (loss) on commodity hedges(199)(2,204)Commodity price risk related to crude oil prices is the Corporation's most significant market risk exposure. Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. The Corporation is also exposed to natural gas price movements on uncontracted gas sales. Natural gas prices, in addition to the worldwide factors noted above, can also be influenced by local market conditions. The Corporation's expenditures are subject to the effects of inflation, and prices received for the product sold are not readily adjustable to cover any increase in expenses from inflation. The Corporation may periodically use different types of derivative instruments to manage its exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows. In Q4 2010, the Corporation entered into a forward swap for 108,668 and 80,600 barrels per month over December and January respectively to hedge a proportion of November and December production. This resulted in a realised loss of $0.5 million and an unrealised gain of $0.3 million in the three months ended 31 March 2011. In Q1 2011 the Corporation purchased a put option with a floor price of $105 / barrel for 804,500 barrels of oil for the period March to December 2011. The option delivers a minimum price on the specified volume of oil and allows the Corporation to benefit from any upside above $105 / barrel. Due to movements in forecast oil prices the revaluation of this instrument as at March 31, 2011 resulted in an unrealised loss of $2.1 million. In February 2012, the Corporation entered into two swap options: to sell 268,800 bbls of the Corporation's March 2012 - December 2012 forecast production at a fixed price of $121.32/bbl; and to sell 500,000 bbls of the Corporation's forecast July 2012 - June 2013 production at $113.25 per barrel. A realised loss of $0.2 million was recorded in the three months ended 31 March 2012. ii) Interest Risk Calculation of interest payments for the Senior Secured Borrowing Base Facility agreement with the Bank of Scotland that was signed on 12 July 2010 incorporates LIBOR. The Corporation will therefore be exposed to interest rate risk to the extent that LIBOR may fluctuate. The Corporation will evaluate its annual forward cash flow requirements on a rolling monthly basis. No funds are currently drawn down under the facility. iii) Foreign Exchange Rate Risk The table below presents the total (loss) on foreign exchange financial instruments that has been disclosed through the statement of net and comprehensive income / (loss):Three months ended 31 March2012 US$'0002011 US$'000Unrealised gain on foreign exchange forward contracts969-Total (loss) on forex forward contracts969-The Corporation is exposed to foreign exchange risks to the extent it transacts in various currencies, while measuring and reporting its results in US Dollars. Since time passes between the recording of a receivable or payable transaction and its collection or payment, the Corporation is exposed to gains or losses on non USD amounts and on balance sheet translation of monetary accounts denominated in non USD amounts upon spot rate fluctuations from quarter to quarter. On 29 November 2011, the Corporation entered into a forward extra plus contract with Lloyds to hedge its forecast British Pounds Sterling 2012 operating costs, including general and administrative expenses. The hedge amounts to $4 million per month (total $48 million) at a US$/£ rate of no worse than USD1.60/1.0 and a trigger rate of USD1.40/£1.00. The contract expires in December 2012. iv) Credit Risk The Corporation's accounts receivable with customers in the oil and gas industry are subject to normal industry credit risks and are unsecured. All of its oil production from the Beatrice, Jacky, and forthcoming Athena field is/will be sold to BP Oil International Limited. Oil production from Cook and Broom is sold to Shell Trading International Ltd. Anglia and Topaz gas production is currently sold through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd and Esso Exploration & Production UK Ltd. The Corporation assesses partners' credit worthiness before entering into farm-in or joint venture agreements. In the past, the Corporation has not experienced credit loss in the collection of accounts receivable. As the Corporation's exploration, drilling and development activities expand with existing and new joint venture partners, the Corporation will assess and continuously update its management of associated credit risk and related procedures. The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at 31 March 2012 over 99% of accounts receivables are current, being defined as less than 90 days. The Corporation has no allowance for doubtful accounts as at 31 March 2012 (31 December 2011: $Nil). The Corporation may be exposed to certain losses in the event that counterparties to derivative financial instruments are unable to meet the terms of the contracts. The Corporation's exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting date. As at 31 March 2012, exposure is $0.5 million (31 December 2011: $Nil). The Corporation also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The maximum credit exposure associated with financial assets is the carrying values. v) Liquidity Risk Liquidity risk includes the risk that as a result of its operational liquidity requirements the Corporation will not have sufficient funds to settle a transaction on the due date. The Corporation manages liquidity risk by maintaining adequate cash reserves, banking facilities, and by considering medium and future requirements by continuously monitoring forecast and actual cash flows. The Corporation considers the maturity profiles of its financial assets and liabilities. As at 31 March 2012, substantially all accounts payable are current. The following table shows the timing of cash outflows relating to trade and other payables. Within 1 year US$'0001 to 5 years US$'000Accounts payable and accrued liabilities98,371-Other long term liabilities-2,876Total98,3712,87622. DERIVATIVE FINANCIAL INSTRUMENTS 31 March 2012 US$'00031 December 2011 US$'000Oil swaps(990)-Embedded derivative(1,496)(1,336)Foreign exchange forward contract459(510)(2,027)(1,846)In February 2012, the Corporation entered into two swap options: to sell 268,800 bbls of the Corporation's March 2012 - December 2012 forecast production at a fixed price of $121.32/bbl; and to sell 500,000 bbls of the Corporation's forecast July 2012 - June 2013 production at $113.25 per barrel.In Q4 2010, the Corporation acquired an embedded derivative within an Anglia gas sales contract. This is recognised at its fair value in the financial statements. Fair value represents the difference between the contract price and the period end market price for the contracted volumes. 23. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIESFinancial instruments of the Corporation consist mainly of cash and cash equivalents, receivables, payables, loans and financial derivative contracts, all of which are included in these financial statements. At 31 March 2012, the classification of financial instruments and the carrying amounts reported on the balance sheet and their estimated fair values are as follows:31 March 2012 US$'00031 December 2011 US$'000ClassificationCarrying AmountFair ValueCarrying AmountFair ValueCash and cash equivalents (Held for trading)89,94489,94495,54595,545Restricted cash20,67720,67716,51016,510Derivative financial instruments (Held for trading)459459--Accounts receivable (Loans and Receivables)81,83481,83480,96080,960Deposits256256247247Commodity hedge (Held for trading)(990)(990)--Contingent consideration(25,874)(25,874)(24,580)(24,580)Derivative financial instruments (Held for trading)(2,486)(2,486)(1,846)(1,846)Other long term liabilities(2,876)(2,876)(2,785)(2,785)Accounts payable (Other financial liabilities)(98,371)(98,371)(102,136)(102,136)24. RELATED PARTY TRANSACTIONSA Director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The amount of fees paid to Burstall Winger LLP in the quarter ended 31 March 2012 was $Nil (31 March 2011 - $0.1 million). The balance outstanding at 31 March 2012 was $Nil (31 March 2011 - $Nil). 25. SEASONALITYThe effect of seasonality on the Corporation's financial results for any individual quarter is not material. 26. SUBSEQUENT EVENTS In April 2012 the Company received Field Development Plan (FDP) approval for the Stella and Harrier fields from the UK Government. The Stella and Harrier fields will benefit fully from the Supplementary Charge shelter provided by the amendments to Small Field Allowances recently announced by the UK Government. FOR FURTHER INFORMATION PLEASE CONTACT: Iain McKendrickIthaca Energy Inc.CEO+44 (0) 1224 650 firstname.lastname@example.orgORGraham ForbesIthaca Energy Inc.CFO+44 (0) 1224 652 email@example.comORJon FitzpatrickNOMAD and Joint Broker: Cenkos Securities plc+44 (0) 207 397 firstname.lastname@example.orgORBeth McKiernanNOMAD and Joint Broker: Cenkos Securities plc+44 (0) 131 220 email@example.comORTim ChapmanJoint Broker: RBC Capital Markets+44 (0) 207 653 firstname.lastname@example.orgORMatthew CoakesJoint Broker: RBC Capital Markets+44 (0) 207 653 email@example.comORPhilip DennisPublic Relations: Pelham Bell Pottinger+44 (0) 207 861 firstname.lastname@example.orgORRollo Crichton-StuartPublic Relations: Pelham Bell Pottinger+44 (0) 207 861 email@example.comThe TSX accepts no responsibility for the adequacy or accuracy of this release.