METGASCO LTD — Interim / Quarterly Report 2011

Mar 13, 2011

METGASCO LIMITED AND THE ENTITIES IT CONTROLLED ACN 088 196 383

CONSOLIDATED FINANCIAL REPORT FOR THE HALF YEAR ENDED 31 DECEMBER 2010

CONTENTS Page

1.	Review of Activities	3
2.	Directors' Report	5
3.	Auditor's Independence Declaration	7
4.	Consolidated Statement of Comprehensive Income	8
5.	Consolidated Statement of Financial Position	9
6.	Consolidated Statement of Cash Flows	10
7.	Consolidated Statement of Changes in Equity	11
8.	Notes to the Consolidated Financial Statements	12
9.	Declaration by Directors	15
10.	Independent Review Report	16
11.	Corporate Directory	18

1. REVIEW OF ACTIVITIES

Metgasco's strategy has been to focus on exploring for coal seam gas and conventional hydrocarbons in the Clarence Moreton basin in New South Wales. The Company has established a dominant position in this basin with a large acreage position of 4,557 km² (1,126,059 acres) with operatorship control through 100% ownership of its assets.

Metgasco has established a significant CSG reserve base and has also made an exciting conventional discovery, the Kingfisher gas field. CSG reserves have been established over less than 10% of the area of Metgasco's tenements. Drilling activity during the past six months has confirmed the extensive deposition of the Walloon Coal Measures throughout the Clarence Moreton basin. This provides further evidence of an extensive resource play with gas bearing coals now identified from wells over 100 km apart. Early results from the Company's 2010 seismic survey indicate that the Kingfisher gas field is one of a number of conventional structures located on a mid-basin high in the Clarence Moreton basin.

Gas reserves are described below:

PEL 16 – Independently certified coal seam gas reserves Petajoules (PJ)
Reserve Category	Current Gas Reserves 100% Metgasco
1P (Proven)	2.7
2P (Proven + Probable)	397
3P (Proven + Probable + Possible)	2,239
2C Contingent Resource	1,177

The estimates of gas reserves have been prepared by Mr Tim Hower, and staff under his supervision, of MHA Petroleum Consultants (Denver). Mr Hower is chairman of MHA and has over 25 years of petroleum engineering experience and is a qualified person as defined under the ASX listing rule 5.11. Reserves have been developed within the guidelines of the SPE. MHA has consented to the use of this information.

During the half year to 31 December 2010 Metgasco has:

• ¾ Extended the CSG exploration program and trialled alternative CSG completion methods by drilling Thornbill E01 (PEL 426), Thornbill E02 (PEL 426), Bowerbird E01 (PEL 13), Bowerbird E02 (PEL 13) and South Casino P11. The wells drilled outside PEL 16 have succeeded in demonstrating the extension of the Walloon Coal Measures into both PEL 13 and PEL 426. All wells drilled identified gassy coals. Data obtained from the Bowerbird wells will be provided to the Company's reserve certifiers for consideration for reserve determination.
• ¾ Completed a detailed mapping of CSG resources in PEL13 to develop an internal view of coal seam gas in place resources. This work will be provided to the Company's reserves certifiers for review.
• ¾ Completed a 140 line km seismic survey over the Eden Creek trend and several conventional leads and prospects. Early results from the Company's 2010 seismic survey indicate that the Kingfisher gas field is one of a number of conventional structures located on a mid-basin high in the Clarence Moreton basin, which have

the potential to contain gas accumulations. This activity fulfilled Metgasco's seismic acquisition work commitments in PEL 13 and PEL 426.

• ¾ Commenced work on revising the Company's inventory of conventional leads and prospects.
• ¾ Conducted further evaluation of the Kingfisher conventional gas field. Metgasco ran a trial stimulation program in a three metre sandstone zone (1450 – 1453 metres) in the Gatton sandstone. This involved pumping nitrogen (an inert gas) under pressure to generate millimetre thick fractures in this zone. Fluids (typically 99% water and sand + 1% additives) then enabled the water/sand mixture to transport the sand deep into the fractures to "prop" them open and allow gas to flow into the wellbore and be collected at the surface. The reservoir responded to the stimulation treatment, however, only half the planned quantity of proppant was able to be placed due to operational issues. Since the fracture stimulation treatment, Metgasco has run a number of flow cycles to clean up the well. These flow cycles resulted in "slugging" in the well and a gas rate was not able to be reliably measured. In late December, this zone was placed on pressure build up test and following completion of this activity, Metgasco intends to flow the well to attempt to establish a stabilised rate. Metgasco then intends to perforate additional upper zones and evaluate the well for completion as a producer.
• ¾ Lodged the Environmental Assessment of the Lions Way Pipeline with the NSW Department of Planning.
• ¾ Metgasco has previously advised that it had conducted an internal review of the coal seam and conventional gas supply capabilities of the tenements it operates which concluded that there is an opportunity to prove up to 4.5 Tcf (2P) in coal seam gas reserves and 1.5 Tcf (P50) in conventional gas resources through a focused reserve development work program.

This volume of gas would be sufficient to supply up to a 3 million tonne per annum LNG plant over a 20 year contract term. In September Metgasco commenced evaluating the commercial, technical and environmental feasibility of a number of export LNG options. In doing so it is working with two potential partners LNG Ltd and FLEX LNG to consider these options. WorleyParsons was appointed to undertake an analysis of pipeline options to Gladstone and to the Port of Brisbane and to evaluate the development of a sub-sea pipeline to an offshore floating LNG facility. In addition, WorleyParsons has prepared a conceptual field development plan for the supply of 90 PJ/a of gas to an LNG project. The final report from WorleyParsons has been received and is currently being reviewed by Metgasco. Further information on the considerations on the commercial prospects of participation in an LNG supply project will be provided to shareholders in due course.

• ¾ Continued commercial discussions with potential buyers of the power output from the Richmond Valley Power Station.
• ¾ Continued commercial discussions with potential gas buyers. These include discussions with:
• o Local gas customers
• o Large gas customers in Queensland
• o Significant international energy corporations

These discussions include the potential for farm-in activities.

¾ The Company appointed Mr Peter Henderson as Managing Director. He is expected to take up his role in March.

2. DIRECTORS' REPORT

Your Directors present their report together with the consolidated financial statements of Metgasco Limited ("Metgasco" or "Company") and its controlled entities for the half year ended 31 December 2010.

Directors

The names of persons who were Directors of Metgasco at any time during the half year and up to the date of this report are as follows:

Name	Role	Qualifications
Nicholas Heath	Chairman (Non-Executive)	B. Eng (Chemical), MAICD
Steven Koroknay	Non Executive Director	B. Eng (Hons) – Civil Eng (Sydney), FAICD, FIEA.
Leonard Gill	Non Executive Director	B.Eng (Hons-Civil Eng),MAICD
David Johnson	Managing Director	B.App Sc (Geol), MBA
Glenda McLoughlin	Executive Director	B. Ec, MBA, FAICD

Principal Activities

Metgasco is engaged in the exploration, appraisal, development and commercialisation of hydrocarbon assets, principally conventional gas and coal seam gas ("CSG") and the development of associated energy infrastructure.

Review of Operations

Information related to the operational performance of the Company is provided on pages 3 to 4 of this Half Year Report.

Financial Results

The operating loss incurred by the Company in the period was \$2,225,333. Employment costs compared to the corresponding period ending 31 December 2009 were higher due to increased share based payment expense recognised, a slight increase in headcount and recruitment costs associated with the new managing director. Administrative costs however are lower in the reporting period due solely to the Company's expensing of the buyout costs of the Sunoco royalty over PEL16 in the prior period. Professional fees have decreased compared to the prior period due to substantial costs associated with the Company's last capital raising which were recognised in prior period.

Significant Events Subsequent to 31 December 2010

In February, Metgasco commenced drilling the Harrier Multi-Lateral Pilot Program. The Harrier pilot wells will target the Richmond coal seam within the Walloon Coal Measures at depths of between 300 and 400 metres. The multi-lateral wells have been designed with two horizontal sections each targeting 1,000 metres of in-seam exposure in total. All wells are located in PEL 16 where Metgasco has a 100% interest.

3. AUDITORS INDEPENDENCE DECLARATION

A copy of the independence declaration by the lead auditor under Section 307C is included on page 7 to these Half Year Financial Statements.

Signed in accordance with a resolution of the Directors.

Dated at Sydney this 14^th day of March 2011.

Inchanghe .

Glenda McLoughlin Director

Tel: +61 2 9286 5555
Fax: +61 2 9286 5599 www.bdo.com.au

Level 19, 2 Market St Sydney NSW 2000 GPO Box 2551 Sydney NSW 2001 Australia

DECLARATION OF INDEPENDENCE BY IAIN KEMP TO THE DIRECTORS OF METGASCO LIMITED

As lead auditor for the review of Metgasco Limited for the half-year ended 31 December 2010, I declare that to the best of my knowledge and belief, there have been:

• no contraventions of the auditor independence requirements of the Corporations Act $\bullet$ 2001 in relation to the review; and
• no contraventions of any applicable code of professional conduct in relation to the $\bullet$ review.

This declaration is in respect of Metgasco Limited and the entities it controlled during the period.

lain Kemp

Director

BDO Audit (NSW - VIC) Pty Ltd

Sydney, Monday 14 March 2011.

BDO Audit (NSW-VIC) Pty Ltd ABN 17 114 673 540
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.

BDO in Australia is a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in
BDO in Australia is a national association of separate entities (each

4. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE HALF YEAR ENDED 31 DECEMBER 2010

	Consolidated Entity Half Year
	31 December 2010 \$	31 December 2009 \$
Other Income	485,788	287,794
Employment expenses Professional fees Borrowing expenses Administration expenses	(1,943,266) (311,165) (11,657) (445,033)	(1,228,629) (745,152) (7,603) (1,260,143)
Loss before income tax expense	(2,225,333)	(2,953,733)
Income tax expense	-	-
Net loss after tax from continuing operations	(2,225,333)	(2,953,733)
Other comprehensive income	-	-
Total comprehensive income for the half year	(2,225,333)	(2,953,733)
Earnings per share attributable to ordinary equity holders of Metgasco Ltd
Basic loss per share	\$ (0.01)	\$ (0.01)
Diluted loss per share	(0.01)	(0.01)

The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

5. CONSOLIDATED STATEMENT OF FINANCIAL POSITION

FOR THE HALF YEAR ENDED 31 DECEMBER 2010

	Consolidated Entity
	31 December 2010 \$	30 June 2010 \$
CURRENT ASSETS
Cash and cash equivalents	13,291,937	20,136,492
Inventory	1,369,840	1,169,395
Trade and other receivables	913,098	729,698
Total Current Assets	15,574,875	22,035,585
NON-CURRENT ASSETS
Exploration and evaluation expenditure	54,277,864	47,837,146
Plant and equipment	4,476,494	4,264,169
Trade and other receivables	796,736	681,736
Total Non-Current Assets	59,551,094	52,783,051
TOTAL ASSETS	75,125,969	74,818,636
CURRENT LIABILITIES
Trade and other payables	3,571,291	1,520,561
Provisions	91,670	97,010
Borrowings	118,128	113,632
Total Current Liabilities	3,781,089	1,731,203
NON CURRENT LIABILITIES
Provisions	415,794	412,888
Borrowings	254,812	198,498
Total Non Current Liabilities	670,606	611,386
TOTAL LIABILITIES	4,451,695	2,342,589
NET ASSETS	____ 70,674,274	___ 72,476,047
EQUITY
Contributed equity	83,164,942	83,004,589
Share option reserve	4,058,891	3,795,684
Retained earnings	(16,549,559)	(14,324,226)
TOTAL EQUITY	70,674,274	72,476,047

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

6. CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE HALF YEAR ENDED 31 DECEMBER 2010

	Consolidated Entity Half Year
	31 December 2010 \$	31 December 2009 \$
CASH FLOWS FROM OPERATING ACTIVITIES Payments to suppliers and employees Interest received	(2,373,038) 480,707	(2,949,365) 285,366
Net cash (outflow) from operating activities	(1,892,331)	(2,663,999)
CASH FLOWS FROM INVESTING ACTIVITIES Expenditure on exploration and evaluation Security bonds paid Government grants received	(4,564,044) (175,000) -	(10,092,853) (15,000) -
Purchases of plant and equipment Disposal of plant and equipment Receipts for exploration activities Inventory reduction	(430,323) 129,005 - -	(117,491) - 105,311 316,564
Net cash (outflow) from investing activities	(5,040,362)	(9,803,469)
CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issue of shares Proceeds/(repayment) of borrowings Finance costs paid	44,507 60,810 (17,179)	25,000,000 (30,418) -
Net cash inflow from financing activities	88,138	24,969,582
NET (DECREASE) IN CASH AND CASH EQUIVALENTS HELD	(6,844,555)	12,502,114
Net cash at beginning of period	20,136,492	17,336,920
NET CASH AT END OF PERIOD	13,291,937	29,839,034

The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes.

7. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF YEAR ENDED 31 DECEMBER 2010

	Contributed Equity	Retained Earnings	Share Option Reserve	Total Equity
	\$	\$	\$	\$
At 1 July 2009	54,105,290	(9,778,869)	3,085,825	47,412,246
Total comprehensive income for the period Transactions with owners in their capacity as owners	-	(2,953,733)	-	(2,953,733)
Issue of share capital Cost of share issues	29,000,000 -	- -	- -	29,000,000 -
Share based expense	-	-	113,322	113,322
As at 31 December 2009	83,105,290	(12,732,602)	3,199,147	73,571,835
Total comprehensive income for the period Transactions with owners in their capacity as owners	-	(1,591,624)		(1,591,624)
Issue of share capital	14,999	-	-	14,999
Cost of share issues	(115,700)	-	-	(115,700)
Share based expense	-	-	596,537	596,537
At 30 June 2010	83,004,589	(14,324,226)	3,795,684	72,476,047
Total comprehensive income for the period Transactions with owners in their capacity as owners	-	(2,225,333)	-	(2,225,333)
Issue of share capital	160,353	-	-	160,353
Cost of share issues Share based expense	- -	- -	- 263,207	- 263,207
At 31 December 2010	83,164,942	(16,549,559)	4,058,891	70,674,274

The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.

8. NOTES TO THE FINANCIAL STATEMENTS

FOR THE HALF YEAR ENDED 31 DECEMBER 2010

Note 1. Summary of Significant Accounting Policies

These general purpose financial statements for the half year reporting period ended 31 December 2010 have been prepared in accordance with AASB Standard 134 "Interim Financial Reporting" and the Corporations Act 2001. The historical cost basis has been used.

These interim financial statements do not include all the notes of the type normally included in annual financial statements and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the full financial statements. Accordingly, these half year financial statements are to be read in conjunction with the annual financial statements for the year ended 30 June 2010 and any public announcements made by Metgasco during the half year reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

The same accounting policies and methods of computation have generally been followed in these half year financial statements as those employed in the Consolidated Entity's 30 June 2010 annual financial statements.

Going Concern

The Group has prepared these half year financial statements on the basis that it is a going concern. In making this assumption the Group acknowledges that from time to time, it relies on the issuing of shares to existing shareholders and equity markets in general. The success or otherwise of the issuing of additional capital is dependent on the continued successful exploration and evaluation activities of the Group's gas reserves and projects, with a view to their ultimate commercial development, and the state of equity capital markets.

Note 2. Segment Information

The group has adopted AASB 8 Operating Segments from 1 July 2009 whereby segment information is presented using a 'management approach', i.e. segment information is provided on the same basis as information used for internal reporting purposes by the executive management team that makes strategic decisions.

This has resulted in 2 possible reportable segments with those being hydrocarbon exploration and the development of the Richmond Valley Power Station project.

Description of segments

Management has determined the operating segments based on reports reviewed by the executive management team for making strategic decisions. The executive management team comprises the chief executive officer, chief financial officer, chief operating officer, general manager exploration and general manager of gas marketing.

Hydrocarbon exploration and development

This segment comprises the exploration, evaluation and development of principally coal seam gas and also conventional gas, in the Clarence Moreton basin on northern NSW.

Richmond Valley Power Station

A 30 megawatt gas fired power station located outside the township of Casino is being developed by the Company.

These segments were not reported in the Company's last annual report or last half year financial report as it was considered at that time that the Company's segments were not exhibiting all the characteristics of typical segments.

No segment revenue is currently derived and all costs associated with these segments are currently capitalised in the Company's financial statements. Therefore no financial data concerning these segments is disclosed in this financial report.

Note 3. Other Income

Other Income is comprised of interest income \$480,707 (2009:\$285,366) and unreaslised exchange gain of \$5,081 (2009: \$2,428).

Note 4. Individually Significant Items

There are no items in the financial statement which the directors consider significant.

Note 5. Contingent Assets and Liabilities

An amount of \$991,736 is included in the balance sheet under Trade and other Receivables, current and also non current. This amount is also disclosed as a contingent liability. The allocation of this amount and the nature of the contingent liability is as follows.

Classed as Trade & Other Receivables - Current

Security deposits with Industry and Investment NSW \$195,000

Classed as Trade and Other Receivables – Non Current

Corporate credit card	\$30,000
Rental bond	\$106,239
Security deposits with Industry and Investment NSW	\$660,497

	No of Shares		Value
Ordinary Shares	Half Year Ended 31 Dec 2010	Year Ended 30 June 2010	Half Year Ended 31 Dec 2010	Year Ended 30 June 2010
Opening Balance	249,006,674	185,994,145	83,004,589	54,105,290
Cost of share issue (net of equity)	-	-	-	(115,700)
Public Issue	-	55,555,555	-	24,999,999
Issued to 3rd parties	226,837	7,378,712	115,846	4,000,000
Exercise of options	144,000	50,000	44,507	15,000
Issued to employees	3,083,461	28,262	-	-
Closing Balance	252,460,972	249,006,674	83,164,942	83,004,589

Note 6. Contributed Equity

Options (not quoted on ASX)	No of Options Half Year Ended 31 Dec 2010	No of Options Year Ended 30 June 2010
Opening Balance	9,221,510	6,944,718
Issued to Employees	-	2,579,978
Issued to Contractors	-	-
Exercised by Employees	(144,000)	(50,000)
Options lapsed	-	(253,186)
Closing Balance	9,077,510	9,221,510

Note 7. Interests in Tenements

A summary of the Consolidated Entity's interests in exploration tenements is as follows.

PEL 13	100%
PEL 16	100%
PEL 426	100%

Note 8. Events Subsequent to Balance Date

At the date of this report there have been no events which have occurred following the end of the reporting period which in the opinion of Directors, require disclosure.

DECLARATION BY DIRECTORS $\mathbf{Q}$

The Directors of METGASCO LIMITED declare that:

• $1₁$ The financial statements comprising the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Cash Flows and Consolidated Statements of Changes in Equity and notes to the consolidated financial statements of the consolidated entity are in accordance with the Corporations Act 2001 and:
• comply with Accounting Standards AASB134 Interim Financial Reporting $(a)$ and the Corporations Regulations 2001; and
• $(b)$ give a true and fair view of the consolidated entity's financial position as at 31st December 2010 and of its performance for the half year ended on that date.
• $2.$ In the Directors' opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of the Directors by:

Mhangh

Glenda McLoughlin Director

Sydney, 14 March 2011

Tel: +61 2 9286 5555 Fax: +61 2 9286 5599 www.bdo.com.au

Level 19, 2 Market St Sydney NSW 2000 GPO Box 2551 Sydney NSW 2001 Australia

INDEPENDENT AUDITOR'S REVIEW REPORT

To the members of Metgasco Limited

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Metgasco Limited, which comprises the statement of financial position as at 31 December 2010, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, notes comprising a statement of accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the disclosing entity and the entities it controlled at the half-year's end or from time to time during the half-year.

Directors' Responsibility for the Half-Year Financial Report

The directors of the disclosing entity are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such control as the directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity's financial position as at 31 December 2010 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. As the auditor of Metgasco Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

BDO Audit (NSW-VIC) Pty Ltd ABN 17 114 673 540

BDO is the brand name for the BDO International network and for each of the BDO Member Firms.

BDO in Australia is a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International). Liability of each Australian entity is limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Metgasco Limited, would be in the same terms if given to the directors as at the time of this auditor's report.

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Metgasco Limited is not in accordance with the Corporations Act 2001 including:

• $(a)$ giving a true and fair view of the consolidated entity's financial position as at 31 December 2010 and of its performance for the half-year ended on that date; and
• $(b)$ complying with Accounting Standard AASB 134 Interim Financial Reporting and Corporations Regulations 2001.

BDO Audit (NSW-VIC) Pty Ltd

lain Kemp. Director Sydney, 14^th day of March 2011

11. CORPORATE DIRECTORY

Directors:	Nicholas Heath	Non-Executive Director
	Steven Koroknay Leonard Gill David Johnson Glenda McLoughlin	and Chairman Non-Executive Director Non-Executive Director Managing Director Executive Director
Company Secretaries:	Glenda McLoughlin Nicholas Geddes
Home Stock Exchange:	Australian Securities Exchange (ASX) 4 Bridge St Sydney NSW 2000
ASX Symbol:	MEL
Principal and Registered Office:	Level 9, 77 Pacific Hwy North Sydney NSW 2060
	Telephone: Facsimile: Website: Email	(02) 9923 9100 (02) 9923 9199 www.metgasco.com.au info@metgasco.com.au
Share Registry:	Computershare Investor Services Pty Limited GPO BOX 7115 Sydney NSW 2001
Auditors:	BDO Audit (NSW-VIC) Pty Ltd Level 19, 2 Market Street Sydney NSW 2000
Bankers:	National Australia Bank Level 17, 500 Oxford St Bondi Junction NSW 2022
Australian Company Number:	ACN 088 196 383
Date and Place of Incorporation:	22 June 1999, Sydney, Australia