(EOG.L) Europa Oil & Gas (Holdings) PLC Buy/Sell

Summary

The Group holds interests in 18 licences (see table), with 15 in Europe and 3 in North Africa. The company strives to maintain a balanced portfolio and has, on an unrisked reserves potential basis, 2% of the portfolio in production, 9% in appraisal, 58% low risk exploration and 31% in high risk, high reward exploration. We believe this balance allows the Group to use production to build revenue through low risk drilling, and pay for high reward wells.

United Kingdom

Production/Development

Crosby Warren

Crosby Warren produces oil from the CW1 well, at about 45bopd. The CW2 well is currently shut-in awaiting a workover. The field is undergoing a production enhancement programme which includes a larger pump on CW1 and a proppant frac stimulation on CW2, a technique which was used to great effect on CW1. These are scheduled to complete during the fourth quarter of 2009.

West Firsby

In May, a series of engineering studies proved that the West Firsby Oilfield had been underperforming and production could be increased by over 40% from its average production of 120 bopd. An upgrade of the facilities will be required to maximize and sustain this production increase and ensure production reliability. In September, OSL Consulting Limited were engaged to design these modifications. Work has already begun and is scheduled to complete in 16 weeks.

On the morning of 22 June 2009, a fire caused damage to two engines and pumps. The emergency shutdown system activated and damage was contained within the engine bund. There were no injuries, no spill of oil, and the equipment was fully insured. Production was quickly restored from the WF7 well and at the time of writing, production from the field was averaging 80 bopd. Work continues to bring both wells back to full production.

The field is being remapped with the aim of determining infill drilling locations. This work is expected to be completed before the end of October. Planning permission has already been obtained for a new well at West Firsby and once a location is determined, this well can be drilled relatively quickly and cheaply.

Whisby

Production continues along a well-defined decline curve for the W4 well. At the end of the reporting period, the well was producing 90 bopd (58 bopd net to Europa) with a cumulative production of approximately 350,000 bbls. No additional work is planned on the well.

Exploration

The UK onshore has several petroleum basins and our exploration efforts over the past year have concentrated on the East Midlands Petroleum Basin and the Weald Basin in Southern England. The East Midlands has a long history of oil and gas production from the Carboniferous and currently produces mainly oil, with rates of up to 2,500 bopd. The Weald Basin produces both gas and oil from Jurassic reservoirs.

PEDL150 (75%) - Hykeham & West Whisby Prospects (East Midlands Petroleum Basin)

The Hykeham prospect received planning consent for drilling in 2008. A moratorium during the bird breeding season at the adjacent Whisby Nature Park means that the well cannot be drilled between the beginning of March and the end of August. For this reason, it was cost effective to spud the well in January 2009 and drill to a depth of 88m before setting surface casing and suspending until the end of the bird breeding season. Europa has signed a contract with British Drilling and Freezing Limited (BDF) for their Rig 28 to drill the main section of Hykeham-1 and it is anticipated that drilling will commence in late 2009 after the rig's current campaign.

Hykeham is a well-defined prospect with clear four-way dip closure and a common spillpoint with the Whisby Oilfield, 1.5km to the northwest. The nearby Caledonian Farm well encountered good oil shows in a 10m thick channel sandstone reservoir, significantly thicker than that seen in the Whisby Oilfield. The well is targeting 10 million barrels of oil in place and is given an in-house risk assessment of better than a 1 in 3 chance of success.

We are excited about drilling this well and regard it as having a good chance of containing commercial hydrocarbons with an estimated 2.4 million barrels of potential recoverable oil. If successful, this well will more than double our reserves and can immediately be in production and generate revenue.

In April 2009 Europa received planning permission to drill an exploration well at West Whisby on the same licence. The West Whisby Prospect has an estimated 2.5 mmbo of most likely prospective reserves.

PEDL180 and PEDL181 (50%) (East Midlands Petroleum Basin)

These two licences cover an area of some 600km2 of the Humber Basin. On this acreage the Wressle prospect, only 7 km from Crosby Warren, is the most-likely low-risk first drill target. In addition, reprocessing of the Immingham 3D seismic survey is underway and there is a strong possibility that the Caister Horst lead, identified for the licence application, will develop into a Saltfleetby Field 'lookalike' (the largest onshore gasfield, with over 73bcf of 2P reserves) and therefore mature into a 'must-drill' prospect.

Management believes that the acquisition of this large prospective area stole a march on the competition and will create a flow of high quality drillable prospects over the coming years.

PEDL222 (50%) (East Midlands Petroleum Basin)

This is primarily protection acreage, connecting the three disparate parts of PEDL150, but also covering the Torksey Field, a subcommercial discovery with potential stratigraphic upside. Work continues on the block, operated by Valhalla.

PEDL143 (40%) - Holmwood Prospect (Weald Basin)

Following a lengthy process of environmental and planning management a planning application was lodged with Surrey County Council in January 2009. In April, the Council requested further information in order for the planning department to submit their recommendation to the committee. A planning decision is expected in late 2009.

There has been some local objection to this application due to its location in an Area of Outstanding Beauty in the Surrey Hills. While understandable, we believe the objections are unjustified. Enormous effort has been made to ensure that the location will not be adversely affected by this temporary development in a secluded, working, Forestry Commission conifer plantation site. Extensive ecological, archeological, noise, light and traffic assessments have been commissioned and these have not revealed any specific causes for concern over the proposed drilling.

P1545 (50%) - East Irish Sea blocks 109/5 and 112/30 (UK Offshore)

The existing 2D seismic database was reprocessed and amplitude variations with offset (AVO) work undertaken to attempt to de-risk the presence of gas in the large structural closure. Amplitude anomalies in the anticipated reservoir sequence did not result in an AVO anomaly. Following this result, it was decided to allow the licence to lapse in 2009 without entering into a drilling commitment.

Romania

EIII-4 Bacau Concession (19%) - Lilieci Discovery

Lilieci-1 reached a total depth of 2,958m in December 2008 encountering a number of gas-bearing sands. Three zones were tested at an aggregate flowrate of 4.6mmscfpd (800 boepd) in February. The Bacau group undertook a further test of extended duration in April-May 2009. The test flowed gas at 2mmscfpd, but demonstrated linear pressure decline during the flow periods. Our assessment is that the well is in contact with a limited volume of gas.

The well was drilled as part of an agreement with the operator whereby Europa's costs were carried and we had an option to back-in to the well after testing, on payment of the carried costs plus a premium. Following the results of the extended test, we elected not to participate in any development of the discovery on commercial grounds.

The consequence of this is that Europa foregoes its 19% working interest in the Lilieci discovery but retains its interest in the remainder of the block, covering some 1,250km2 and including oil plays in the thrust belt in the western part of the licence. This area remains under explored and is likely to benefit from further seismic investigation in 2010.

Work continues on maturing the prospectivity of the Bacau licence. A four-year extension has been secured which will allow work to progress on developing prospects in the western, thrustbelt, area of the block. In addition, it is expected that partner Romgaz will acquire seismic in late 2009 over the southern part of the licence.

EIII-1 Brodina Concession (28.75%) - Voitinel Prospect

The high potential Voitinel Prospect was spudded in August 2009. The well targeted the sub-thrust Badenian sandstones which produce in the Lopushnya Field to the north. Disappointingly, the primary target sandstones were dry. Several shallower sandstones had gas shows and the deepest of these flowed on test at a rate of 1.6 mmscfpd with a flowing pressure of 55 bar. The forward plan is to perforate additional zones and undertake multi-rate tests during late October and we will report the full results in due course.

The Voitinel-1 well was scheduled to take 52 days to reach total depth (TD) but actually reached TD in under 30 days. The savings achieved have allowed the Group to bring forward the UK production enhancement programmes.

EPI-3 Brates Concession (20%) - Barchiz and Deep Tazlaul Mare Prospectivity

Equity interest in the concession was previously split differently between Eastern and Western parts. During the year Europa agreed to reduce overall interest in the combined Brates block to 20%.

Specialised seismic processing of seismic data acquired in 2008 over the complex thrust belt area has demonstrated some remarkable improvement in imaging, notably in the Tazlaul Mare area. Structural modeling has postulated that a thrusted sequence of prospective Oligocene sediments must underpin the Tazlaul Mare structure, where a gas condensate field has been developed in the shallower section. On conventional seismic data, it is not possible to see any of the detailed structure of the deep Tazlaul Mare area, but trials of the new processing clearly demonstrates highly promising structural rollover with size in the 50-100mmbo prospective resources range. Further lines will be processed using this technique in order to mature this lead for drilling.

Elsewhere on the concession, the Barchiz Prospect, situated on the same structural trend as the 50mmbo Geamana Oilfield, is anticipated to be drilled in 2010.

EIII-3 Cuejdiu Concession (17.5%) - Boistea Gas Discovery

The Boistea-1 well tested gas at modest rates from Sarmatian sands after suffering formation damage during testing. It is clear from the flow rates at Lilieci-1, where reservoir quality and pressure are similar, that un-damaged formation at Boistea should flow at significantly higher rates than the original test. It is therefore possible that a reservoir frac treatment, coupled with a long-term test, could generate a viable commercial development for Boistea.

France

Europa holds two licences in the Aquitaine Basin.

Tarbes Val d'Adour (100%)

In Tarbes Val d'Adour, effort is focused on the potential re-development of the Osmets Oilfield. This field was shut-in by Total during a time of very low oil price in the mid 80's. Europa has reprocessed a large amount of seismic, including 600km of 2D data in the vicinity of the Osmets play and is working with BRGM, the French Geological Survey, to undertake a regional geological study. With the early production data now received from Total, Europa intends to re-interpret the area with the expertise of BRGM, with the aim of finding a suitable well location in 2010 to re-develop the Osmets Oilfield.

Béarn des Gaves (100%)

In the Béarn des Gaves permit, there are a number of wells that have showed gas, including the deep Berenx-1 well, which encountered high pressure gas in the same reservoir as the 5TCF Lacq gasfield. In the western part of the licence, several shallow wells drilled in the early part of the 20th century flowed oil and gas. This western part of the licence is therefore the primary focus for exploration.

Poland

An early stage investment for Europa was in the North Carpathian area of Poland, home to a number of oil and gas fields in similar settings to the Company's Romanian acreage. As a result of this initial working interest in Blocks 434, 435, 454 and 455 in southern Poland, Europa acquired a 2.5% overriding royalty interest in any oil and gas production.

The current operator RWE Dea, the E&P arm of the German utility, has recently drilled several wells in the licence areas and plans to drill a number of appraisal wells to the Pola-1 oil discovery starting in November 2009. In advance of any production from these Blocks, the Company is in the process of clarifying the legal status of the royalty.

Egypt

Europa, along with its partner Solaris Energy plc, has identified several structural leads each with reserves potential of 15 - 35mmbo recoverable in the Sukhna area of the concession. Sukhna is a coastal plain where the Gulf of Suez (GOS) rift comes onshore and its proven petroleum system is indicated to extend into the area of these mapped leads. The GOS, despite its small overall size, is an extraordinarily prolific petroleum system, having produced over 5 billion barrels to date.

Although Europa has made significant progress with the existing seismic data, we have been unable to reprocess as planned due to degradation of the original tape records. We have therefore decided to progress directly to seismic acquisition with the objective of firming up drillable targets. The cost of the survey, detailed in the winning tender, will for the most part be covered by the existing letter of guarantee that Europa provided in favour of Egyptian General Petroleum Corporation (EGPC).

In June EGPC granted Europa a six month extension on the first phase of the West Darag concession in order to permit the acquisition of approximately 350km of 2D seismic data prior to making the decision to enter into Phase 2. The preferred contractor for this new seismic acquisition has indicated its availability to undertake the survey starting in October.

Western Sahara

Europa holds two large exploration permits, Bir Lehlou and Hagounia in Western Sahara licensed by the Saharawi Arab Democratic Republic. Due to the ongoing dispute over sovereignty between the indigenous Saharawi people and the Moroccan state, the licences are effectively in force majeure until such time as a resolution is reached.

Bir Lehlou (100%)

The Bir Lehlou permit is located in southwest of the Tindouf Basin. This is a sub-set of the large Palaeozoic basin which once covered North Africa and shares a common history with the Sirte and Murzuq Basins in Libya, along with the Ghadammes and Reggane Basins in Algeria. While these analogous basins have world-class volumes of proven hydrocarbons, the Tindouf is almost totally unexplored. This is primarily a function of it remote location and the fact that the basin is thought to be over mature for oil but remains gas bearing in the southern portion, where the Bir Lehlou permit is located. The basin is estimated to contain over 8000 metres of sediment and if found to be hydrocarbon bearing could be equally as prolific as the Libyian and Algerian Basins.

Hagounia (100%)

The Hagounia permit lies in the El Aaiun Basin in the coastal region of Western Sahara in a setting similar to other West African coastal margin basins, such as Mauritania. The basin formed as an extensional rift system during the Late Triassic to Lower Jurassic, followed by subsidence and renewed rifting during the Cretaceous period. Source rocks which were deposited in the basin during the Jurassic are now mature for oil and overlain by Cretaceous clastics and further organic-rich marine shales. Triassic age organic-rich shales may also provide a second deeper petroleum system.

Although there has been little exploration in the El Aaiun, gas shows have been recorded in Triassic through Tertiary age sediments. Oil shows were present in one well in Jurassic age sediments and the Cap Juby Field, which lies on trend in Morocco, produced heavy oil on test at a rate of 2,400 bopd from Jurassic carbonates.

Ukraine

A letter of intent was signed between the company and a Swedish-listed oil and gas company in anticipation of an outright sale of the Ukraine assets. Progress has been slow due to the legal process in Ukraine but we move towards completion.

Paul Barrett Managing Director

Financial review

Results for the year

Group revenue for the year was £2,936,000 (2008: £4,418,000).

UK oil revenues during the year ended 31 July 2009 were 77,743 barrels or 213 bopd (2008: 88,710 barrels or 242 bopd). Crosby Warren production was down by 7,931 barrels or 22 bopd due to technical problems with the CW2 well. Approximately 2,000 barrels of West Firsby production was delayed as a result of reduced production following the fire on 22 June 2009.

The selling price for Europa's UK production is contracted at a small discount to Brent crude price. Average price achieved in the year to 31 July 2009 was $62.30 per barrel (2008: $99.45).

A stronger US Dollar in the year to 31 July 2009 meant that some of the reduced Dollar revenue was recovered as the sales were translated to Sterling at an average rate of $1.6533 (2008: $2.0050).

The Crosby Warren field sells a very small quantity of gas to the nearby Corus steelworks.

Cost of sales increased due to site maintenance and higher chemicals costs. For the calculation of the depletion charge included in cost of sales, the Group adopted the findings of the reserves report issued by Energy Resource Consultants Limited dated 23 November 2008. The intangible asset associated with the East Irish Sea exploration was written off in the year. Administrative expenses increased as a result of a charge in respect of stock options granted to two directors in the previous year.

Finance income and finance costs were both affected by exchange fluctuations. The cost of an out-of-the-money interest rate swap with current fair value of £ 40,000 was recognised.

The results for 2009 show a profit before taxation of £423,000 (2008: £ 2,054,000).

Taxation

The total tax charge (current and deferred) for the year was £356,000 (2008: £ 1,609,000). All of the charge relates to UK activities where the 20% Supplemental Charge applies to producing fields. The Field Allowance incentive announced by HMRC in April 2009, will exempt future UK onshore discoveries from the Supplemental Charge.

Profit after tax

The results for 2009 show a profit from continuing activities after taxation of £67,000 (2008: £445,000).

Discontinued operations

As announced in 2008, Europa has entered into discussions with a Swedish oil and gas company to divest the Group's remaining assets in Ukraine. The assets were substantially written down in 2007 and are presented as a discontinued activity, with a full provision.

Cashflow

Net cash inflow from operating activities was £1,411,000 (2008: £2,942,000). Net cash used in investing activities was £1,121,000 (2008: £4,058,000). The net overdraft at the end of the year was £292,000 (2008: £1,019,000).

Financial risk

Europa's activities are subject to a range of financial risks including commodity prices, liquidity within the business and of counterparties, exchange rates and loss of operational equipment or wells. These risks are managed through ongoing review taking into account the operational, business and economic circumstances at that time.

Commodity price and currency

The Board has considered the use of financial instruments to hedge oil price and US Dollar exchange rate movements. To date, the Board has not hedged against price or exchange movements, but intends to regularly review this policy.

Sales revenue is generated primarily in US Dollars and these funds are matched where possible against expenditures within the business. However, most capital and operating expenditures are Euro and Sterling denominated which results in a currency exposure. US Dollar receipts have been used to purchase Euros and Sterling.

Liquidity

Detailed cash forecasts are prepared frequently and reviewed by management and the Board.

The Group's production provides a monthly inflow of cash and is the main source of working capital and project finance. Additional cash is available from a £1 million multi option facility and a £1 million term loan provided by Europa's bankers. The principal interest rate risk for the Group is the interest charge arising from utilisation of this facility.

On 12 March 2008, with the bank facility fully utilised, short term funding was provided by the Sherborne Trust, a discretionary trust of which C W Ahlefeldt-Laurvig was a beneficiary. The Trust provided a £512,000 loan. On 2 April 2008 this loan was assigned to C W and Mrs M Ahlefeldt-Laurvig. The loan, plus £25,000 of accrued interest, was outstanding at 31 July 2008 but fully repaid in August 2008.

On 1 December 2008 the share finance facility with Headstart terminated. Since the facility was put in place on 1 June 2006 three draw downs were made for a total £300,000 in exchange for the issue of new ordinary shares. On 31 May 2009, 300,000 warrants which were issued to the Headstart Group of Funds as part of the above financing arrangement expired.

Exploration, drilling and operational risk

The business of exploration and production of oil and gas involves a high degree of risk. Few properties that are explored are ultimately developed into producing oil and gas fields.

Significant expenditure is required to establish the extent of oil and gas reserves through seismic surveys and drilling and there can be no certainty that oil and gas reserves will be found. The exploration and development of oil and gas assets may be curtailed, delayed or cancelled by unusual or unexpected geological formation pressures, oceanographic conditions, hazardous weather conditions or other factors.

There are numerous risks inherent in drilling and operating wells, many of which are beyond the company's control. The Group's operations may be curtailed, delayed or cancelled as a result of environmental hazards, industrial accidents, occupational and health hazards, technical failures, shortage or delays in the delivery of rigs and/or other equipment, labour disputes and compliance with governmental requirements.

Drilling may involve unprofitable efforts, not only with respect to dry wells, but also to wells which, though yielding some oil or gas, are not sufficiently productive to justify commercial development. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs.

Appropriate insurance cover is obtained annually for all of Europa's exploration, development and production activities.

Accounting policies

The Group has not made any material changes to its accounting policies in the year to 31 July 2009

Phil Greenhalgh Finance Director

Consolidated income statement for the year ended 31 July 2009

£000 £000

Continuing operations
Revenue 2,936 4,418
Other cost of sales (1,694) (1,548)
Exploration write-off (297) (1)
Total cost of sales (1,991) (1,549)

Gross profit 945 2,869

Administrative expenses (498) (376)
Finance income 224 12
Finance costs (248) (451)

Profit before taxation 423 2,054
Taxation (356) (1,609)

Profit for the year from continuing operations 67 445

Discontinued operations
Loss for the year from discontinued operations (47) (296)

Profit for the year attributable to
the equity shareholders of the parent 20 149
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Pence Pence
Earnings / (loss) per share (eps) per share per share
Basic eps from continuing operations 0.11p 0.71p
Basic eps from discontinued operations (0.08)p (0.47)p
Basic eps from continuing and discontinued operations 0.03p 0.24p
Diluted eps from continuing operations 0.11p 0.70p
Diluted eps from discontinued operations (0.08)p (0.47)p
Diluted eps from continuing and discontinued operations 0.03p 0.24p

Consolidated balance sheet as at 31 July 2009

£000 £000

Assets

Non-current assets
Intangible assets 7,473 7,241
Property, plant and equipment 5,554 5,996

Total non-current assets 13,027 13,237

Current Assets
Inventories 15 16
Trade and other receivables 469 656
Cash and cash equivalents 4 3

Total current assets 488 675

Total assets 13,515 13,912
======== ========

Liabilities

Current liabilities
Trade and other payables (900) (1,752)
Current tax liabilities (588) (380)
Fair value through profit or loss (40) -
Short-term borrowings (767) (1,548)

Total current liabilities (2,295) (3,680)

Non-current liabilities
Long-term borrowings (772) (302)
Deferred tax liabilities (2,651) (2,701)
Long-term provisions (1,137) (1,058)

Total non-current liabilities (4,560) (4,061)

Total liabilities (6,855) (7,741)

Net assets 6,660 6,171
======== ========

Capital and reserves attributable to equity holders of the parent

Share capital 626 626
Share premium account 4,692 4,692
Merger reserve 2,868 2,868
Forex reserve 352 (21)
Retained earnings (1,878) (1,994)

Total equity 6,660 6,171
======== ========

Consolidated statement of changes in equity for the year ended 31 July 2009 Attributable to the equity holders of the parent

Share Share Merger Forex Retained Total
capital premium reserve reserve earnings equity
£000 £000 £000 £000 £000 £000
Balance at 1 August 2007 620 4,597 2,868 5 (2,140) 5,950

Exchange difference on translation
of foreign operations - - - (26) - (26)
Profit for the year - - - - 149 149

Total recognised income
and expense for the year - - - (26) 149 123
Share based payment - - - - (3) (3)
Issue of share capital 6 95 - - - 101

Balance at 31 July 2008 626 4,692 2,868 (21) (1,994) 6,171
======= ======= ======= ======= ======= =======
Balance at 1 August 2008 626 4,692 2,868 (21) (1,994) 6,171

Exchange difference on translation
of foreign operations - - - 373 - 373
Profit for the year - - - - 20 20

Total recognised income
and expense for the year - - - 373 20 393
Share based payment - - - - 96 96

Balance at 31 July 2009 626 4,692 2,868 352 (1,878) 6,660
======= ======= ======= ======= ======= =======

Consolidated cash flow statement for the year ended 31 July 2009

£000 £000

Cash flows from operating activities

Profit after taxation from continuing operations 67 445

Adjustments for:
Share based payments 96 (3)
Depreciation 576 590
Exploration write-off 297 1
Loss on sale of non-current assets - 2
Finance income (224) (12)
Finance expense 248 451
Taxation expense 356 1,609
Decrease in trade and other receivables 187 351
Decrease in inventories 1 20
Increase / (decrease) in trade and other payables 34 (190)

Cash generated from continuing operations 1,638 3,264
Loss after taxation from discontinued operations (47) (296)

Adjustment for:
Depreciation including exploration and write offs - 296

Cash used in discontinued operations (47) -
Income taxes paid (180) (322)

Net cash from operating activities 1,411 2,942

Cash flows used in investing activities
Purchase of property, plant and equipment (191) (1,438)
Purchase of intangible assets (930) (3,655)
Proceeds from sale of property, plant and equipment - 23
Proceeds from sale of discontinued operations - 1,000
Interest received - 12

Net cash used in investing activities (1,121) (4,058)

Cash flows from financing activities
Proceeds from issue of share capital - 100
Underwriting fee - (5)
Proceeds from long-term borrowings 1,000 496
Repayment of borrowings (585) (452)
Interest paid (138) (144)

Net cash from / (used in) financing activities 277 (5)

Net increase /(decrease) in cash and cash equivalents 567 (1,121)
Exchange gain / (loss) on cash and cash equivalents 160 (47)
Cash and cash equivalents at beginning of year (1,019) 149

Cash and cash equivalents at end of year (292) (1,019)
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Notes

1. The financial information here presented is extracted from the audited

accounts of the Group for the 12 months to 31 July 2009. 2. Basic earnings per share is calculated based on an average number of shares

in issue of 62,563,730 (2008: 62,401,492). 3. Diluted earnings per share includes the effect of stock options and uses an

average number of shares of 62,563,730 (2008: 63,180,482).

4. The accounts were approved by the Board on 19 October 2009. They will be

posted to shareholders next week and available on the company

website www.europaoil.com later today.

END