METGASCO LTD — Interim / Quarterly Report 2012

Feb 22, 2012

METGASCO LIMITED AND THE ENTITIES IT CONTROLLED ACN 088 196 383

CONSOLIDATED FINANCIAL REPORT FOR THE HALF YEAR ENDED 31 DECEMBER 2011

METGASCO - FINANCIAL REPORT FOR HALF YEAR ENDED 31 DEC 2011

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CONTENTS $1.$ Review of Activities $2.$ Directors' Report 5 3. Auditor's Independence Declaration $\overline{7}$ $\overline{4}$ . 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 has established large unconventional gas resources in New South Wales. The Company is continuing to progress multiple strategies to develop and commercialise its gas reserves. The focus of this strategy is to build a portfolio of gas sale agreements which ensures that Metgasco has multiple paths to markets and includes supply of gas to domestic customers, domestic power generation and export liquefied natural gas (LNG) projects.

During the half year Metgasco was pleased to announce that it had entered into it's first binding gas sale agreement. This ten year sales agreement is with local dairy manufacturing company Richmond Dairies Pty Ltd to supply natural gas to their manufacturing facility in Casino. Richmond Dairies processes milk from local farms to produce a range of specialty dairy products primarily for sale into export markets. The Managing Director of Richmond Dairies, Mr Chris Sharpe said "The northern NSW dairy industry is already facing difficulty competing with other regions and disparity in energy costs is an unnecessary burden. With access to energy at prices consistent with Victorian processors, Richmond Dairies believes its business can remain economically viable and help preserve a vital industry that has operated on the north coast for over 100 years".

In addition to gas sales to local customers, Metgasco continues to make progress on discussions on other gas sale arrangements. Metgasco holds the largest uncontracted independent gas reserves on the east coast of Australia. The Company considers it is in a strong position to capitalise on the growing demand for gas on the east coast.

While the Company is observing strong demand for gas and is making progress in its appraisal and exploration activities, it has experienced ongoing delays in obtaining approvals from the NSW Government. The Company anticipates that that this situation will improve in 2012, with the introduction of the NSW Government's Strategic Regional Land Use and Aquifer Interference policies.

Metgasco provided a submission to the NSW Upper House Inquiry into coal seam gas and our executives appeared before the inquiry to provide further information to the members of the Committee. The committee conducting this inquiry is expected to provide its findings in April 2012. In addition, the NSW Government has advised that it intends to introduce a number of new regulations with respect to the coal seam gas industry in the coming months. These include: a Strategic Land Use policy, an Aquifer Interference Policy and a review by the NSW Chief Scientist of Well Construction Standards and Hydraulic Fracturing Standards. The Commonwealth Government has recently announced the establishment of an Independent Expert Scientific Committee to provide advice on Coal Seam Gas and Coal Mining.

During the half year to 31 December 2011 Metgasco has:

• $\triangleright$ Expanded its gas reserves to 2,542 PJ (3P) by achieving its first certified gas reserves in PEL 13. Additional gas resources in PEL 13 have been identified with an initial certification of 1,334 PJ of 2C (Contingent Resources). All gas reserves are currently recognised in the Walloon Coal Measures.
• $\triangleright$ Signed a binding gas sale agreement with Casino NSW based manufacturing company Richmond Dairies Pty Ltd to supply it gas.

• $\prec$ Observed encouraging early gas production rates from the next generation Harrier P01 pilot production well. This well is currently shut in pending expansion of the Company's water handling facilities.

• $\triangleright$ Undertaken a major desk top study of the coal measures in PEL 426 to better define the prospectivity of this tenement from a CSG perspective.

• Completed the raising of \$21.55 million in new capital to progress the Company's gas commercialisation and appraisal program.

• $\triangleright$ Completed a number of studies on the conventional potential of the Company's acreage. The objective of these studies is to develop a better understanding of the controls on hydrocarbon prospectivity in the Clarence Moreton basin. The Company has completed a major remapping of leads and prospects in the Company's tenements. A second element to this program has been an examination and analysis of core and cutting samples from wells previously drilled within the basin. This study has provided further evidence of improved reservoir quality in the deeper, Ripley Road and Laytons Range conglomerate, sections of the basin.

2. RESERVE STATEMENT

Independently certified reserves petajoules (PJ)
Reserve Category	Current Gas Reserves 100% Metgasco
1P (Proven)	2.7
2P (Proven + Probable)	428
3P (Proven + Probable + Possible)	2,542
2C Contingent Resource	2.511

Metgasco's reserve statement is described below:

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.

3. 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 2011.

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
Peter Henderson	Managing Director & Chief Executive Officer	B.Eng (Mech), GAICD, SPE
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 \$2,938,446.

Significant Events Subsequent to 31 December 2011

Board and Management Changes

After nearly ten years as an Executive Director, Ms Glenda McLoughlin has announced her intention to retire from the Metgasco Board and also from her positions as Chief Financial Officer and Company Secretary. The Board expresses its appreciation of Ms McLoughlin's enormous contribution to Metgasco over an extended period.

The role of Chief Financial Officer and Company Secretary will be assumed by Mr Sean Hooper. Mr Hooper is currently Metgasco's Financial Controller. Mr Hooper is a chartered accountant who has worked in Singapore, London and Sydney. He has previous experience in CFO and Company Secretary roles with ASX and AIM listed companies and was formerly the financial controller and company secretary for Horizon Oil Limited.

4. 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 23^rd day of February 2012.

Glenda McLoughlin Director

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 2011, 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 2001 in relation to the review; and
• no contraventions of any applicable code of professional conduct in relation to the review.

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

Iain Kemp Director

BDO Audit (NSW-VIC) Pty Ltd Sydney, 23rd of February 2012

5. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE HALF YEAR ENDED 31 DECEMBER 2011

	Consolidated Entity Half Year
	31 December 2011 \$	31 December 2010 \$
Other Income	569,780	485,788
Employment expenses Professional fees Borrowing expenses Administration expenses	(2,350,911) (671, 022) (13,500) (472, 793)	(1,943,266) (311, 165) (11, 657) (445, 033)
Loss before income tax expense	(2,938,446)	(2, 225, 333)
Income tax expense
Loss after tax	(2,938,446)	(2, 225, 333)
Other comprehensive income
Total comprehensive income for the half year	(2,938,446)	(2, 225, 333)
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.

6. CONSOLIDATED STATEMENT OF FINANCIAL POSITION

FOR THE HALF YEAR ENDED 31 DECEMBER 2011

	Consolidated Entity
	31 December	30 June
	2011	2011
	\$	\$
Assets
Current Assets
Cash and cash equivalents	17,866,388	8,878,793
Inventory	1,462,797	1,463,266
Trade and other receivables	604,198	553,880
Total current assets	19,933,383	10,895,939
Non-current assets
Exploration and evaluation expenditure	64,969,393	62,150,836
Plant and equipment	4,245,228	4,290,890
Trade and other receivables	856,736	856,736
Total non-current assets	70,071,357	67,298,462
Total assets	90,004,740	78,194,401
Liabilities
Current Liabilities
Trade and other payables	1,019,608	1,725,618
Provisions	374,044	524,200
Borrowings	136,128	102,177
Total current liabilities	1,529,780	2,351,995
Non-current liabilities
Provisions	1,665,024	1,621,724
Borrowings	185,707	224,088
Total non-current liabilities	1,850,731	1,845,812
Total liabilities	3,380,511	4,197,807
Net assets	86,624,228	73,996,594
Equity
Contributed equity	104,116,311	89,106,562
Share option reserve	4,838,238	4,281,907
Accumulated losses	(22, 330, 321)	(19, 391, 875)
Total equity	86,624,228	73,996,594

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

7. CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE HALF YEAR ENDED 31 DECEMBER 2011

	Consolidated Entity Half Year
	31 December 2011 \$	31 December 2010 \$
CASH FLOWS FROM OPERATING ACTIVITIES Payments to suppliers and employees Interest received	(2,961,522) 562,621	(2,373,038) 480,707
Net cash (outflow) from operating activities	(2,398,901)	(1,892,331)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditure on exploration and evaluation Security bonds paid	(3,743,498)	(4, 564, 044) (175,000)
Government grants received Purchases of plant and equipment	346,128 (189, 428)	(430, 323)
Disposal of plant and equipment Inventory reduction	37,191 469	129,005
Net cash (outflow) from investing activities	(3, 549, 138)	(5,040,362)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issue of shares Proceeds/(repayment) of borrowings Finance costs paid	15,009,749 (60, 615) (13,500)	44,507 60,810 (17, 179)
Net cash inflow from financing activities	14,935,634	88,138
NET (DECREASE) IN CASH AND CASH EQUIVALENTS HELD	8,987,595	(6,844,555)
Net cash at beginning of period	8,878,793	20,136,492
NET CASH AT END OF PERIOD	17,866,388	13,291,937

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

8. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF YEAR ENDED 31 DECEMBER 2011

	Contributed Equity	Retained Earnings	Share Option Reserve	Total Equity
	\$	\$	\$	\$
At 1 July 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 Cost of share issues	160,353			160,353
Share based expense			263,207	263,207
As at 31 December 2010	83,164,942	(16, 549, 559)	4,058,891	70,674,274
Total comprehensive income for the period Transactions with owners in their capacity as owners		(2,842,316)		(2,842,316)
Issue of share capital	6,278,450			6,278,450
Cost of share issues	(336, 830)			(336, 830)
Share based expense			223,016	223,016
At 30 June 2011	89,106,562	(19, 391, 875)	4,281,907	73,996,594
Total comprehensive income for the period Transactions with owners in their capacity as owners		(2,938,446)		(2,938,446)
Issue of share capital	15,357,626			15,357,626
Cost of share issues	(347, 877)			(347, 877)
Share based expense			556,331	556,331
At 31 December 2011	104,116,311	(22, 330, 321)	4,838,238	86,624,228

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

9. NOTES TO THE FINANCIAL STATEMENTS

FOR THE HALF YEAR ENDED 31 DECEMBER 2011

Note 1. Summary of Significant Accounting Policies

These general purpose financial statements for the half year reporting period ended 31 December 2011 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 2011 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 2011 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 in 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 \$562,621 (2010: \$480,707) and unrealised exchange gain of \$7,159 (2010: \$5,081).

Note 4. Individually Significant Items

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

	No of Shares		Value
Ordinary Shares	Half Year Ended 31 Dec 2011	Year Ended 30 June 2011	Half Year Ended 31 Dec 2011	Year Ended 30 June 2011
Opening Balance	276,213,792	249,006,674	89,106,562	83,004,589
Cost of share issue (net of equity)			(347, 877)	(336, 830)
Public Issue	58,723,231	23,846,153	15,267,800	6,200,000
Issued to 3 rd parties		226,837		115,846
Exercise of options	270,000	394,000	89.826	122,957
Issued to employees	4.136.411	3,083,462
Employee shares cancelled	(115,278)	(343.334)
Closing Balance	339,228,246	276,213,792	104,116,311	89,106,562

Note 5. Contributed Equity

No of Options Half Year Ended 31 Dec 2011	No of Options Year Ended 30 June 2011
8,171,954	9.221,510
	(394,000)
	(655, 556)
7.901.954	8,171,954
	(270,000)

Note 6. Interests in Tenements

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

100%
100%
100%

Note 7. 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.

10. DECLARATION BY DIRECTORS

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:
• $(a)$ comply with Accounting Standards AASB134 Interim Financial Reporting and the Corporations Regulations 2001; and
• $(b)$ give a true and fair view of the consolidated entity's financial position as at 31^st December 2011 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:

Glenda McLoughlin Director

Sydney, 23^rd February 2012

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 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the halfyear ended on that date, notes comprising a statement of accounting policies and other explanatory information, and the directors' declaration.

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 internal 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 the half-year 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 2011 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.

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 2011 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

Iain Kemp Director Sydney, 23rd day of February 2012

12. CORPORATE DIRECTORY

Directors:	Nicholas Heath	Non-Executive Director and Chairman
	Steven Koroknay Leonard Gill Peter Henderson	Non-Executive Director Non-Executive Director Managing Director and CEO
	Glenda McLoughlin	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