2009-perc-annual-report by Philippine Integrated Advertising Agency, Inc.

Growing bright and green buds in brown fields is our metaphor for the Company’s expansion into clean and renewable energy. Our two-year preparation for this venture bore fruit in 2009 as we were awarded by the Department of Energy two wind energy and one geothermal energy service contracts, a modest but auspicious beginning for expanded long-term growth and profitability. Complementing this expansion is the continued growth of our core oil production business in Gabon where our Consortium put on-line the Ebouri field, the third commercial field in our Gabon block. Additional drilling and production processes optimization in 2010 aim to increase our daily crude production from 20,000 barrels to 30,000 barrels.

Our cover and inside page illustrate the new face of our Company, from an oil exploration firm to a full upstream energy company with oil and renewable energy projects in Gabon and in the Philippines.

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

Table of Contents Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

BOA/PRC Reg. No. 0001 - Message from The Chairman SEC Accreditation No. 0012-FR-1 and The President .................................................. 2

INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of Directors PetroEnergy Resources Corporation 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City

- Financial Highlights ................................................ 10 - Statement of management’s Responsibility for Financial Statements ................. 11 - Independent Auditors Report ................................. 12 - Financial Reports ................................................... 14

- Notes to Financial Statements ............................... 19 We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 and 2008, and the - Board of Directors .................................................. statements of income, statements of comprehensive income, statements of changes in equity and 67 statements of cash flows for each of the three years in the period ended December 31, 2009, and a - Corporate Directory ................................................ 68 summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

Dear Fellow Stockholders, HIGHLIGHTS

etroleum exploration is not for the faint hearted. It is a very risky business marked by seasonal volatility and boom-and-bust cycle. But your Company, PetroEnergy Resources Corporation, has survived and adapted to the many global economic upheavals that have forced even larger companies to undergo drastic changes to maintain their viability. PetroEnergy’s survival in the face of uncertainty and its continuing success is a story of persistence, adaptation and growth. In 2009, our Gabon operations produced 8.17 million barrels of oil (mmbo) a 4.86 % increase over the previous year’s 7.79 mmbo. This led to a 9.60 % increase in total crude sold from 7.60 mmbo in 2008 to 8.33 mmbo in 2009. But due to lower average crude oil selling price of US$ 59/bbl in 2009 compared with 2008’s US$ 93/bbl, our oil revenue declined from US$ 10.90 Million to US$ 8.68 Million. Our net income for 2009 amounted to US$ 1.72 Million vs. US$ 2.24 Million in 2008. This decline translated to a slight decrease in our earnings per share from US$ 0.016 in 2008 to US$ 0.013 in 2009. On a positive note, however, our book value per share increased this year to US$ 0.155 from last year’s US$ 0.147.

7.0

2.50

0.16

0.018

6.0

2.00

0.15

0.016

5.0

1.50

0.14

0.014

4.0

1.00

0.13

0.012

3.0

0.50

0.12

0.010

2.0

0.00 Operating Income

0.11 Net Income

0.008 Book Value per share

All amounts in US$, Operating and Net Income in Millions

2007

2008

2009

Earnings per share

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632)PetroEnergy 891 0307 Today, as the global economic growth teeters on a precarious recovery, is Fax: (632) 819 0872 forging ahead with new, far-ranging projects instead of contracting its activities, as many companies www.sgv.com.ph are doing. It is investing, instead of conserving. It is growing green buds in a brown field. BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1

In 2009, our two-year ground preparation for Renewable Energy (RE) ventures bore early INDEPENDENT AUDITORS’ fruits. We were awardedREPORT by the Department of Energy (DOE) two wind energy service contracts for Sual, Pangasinan and Nabas, Aklan. We were the first company to receive new wind service contracts under the 2008 Renewable Energy Law.

The Stockholders and the Board of Directors Our successful into RE continued when we submitted the lone qualifying bid for PetroEnergy Resourcesexpansion Corporation the Maibarara geothermal field in Laguna-Batangas in DOE’s geothermal contracting round in 7th Floor, JMT Building ADBOctober Avenue, Ortigas Center, Pasig City the Maibarara geothermal service contract to PetroEnergy 2009. DOE officially awarded on February 1, 2010. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Awarding of DOE

service contracts Management is responsible for the preparation and fair presentation of these financial statements in to PERC for Sual and accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Nabas wind projects implementing and maintaining internal control relevant to the preparation and fair presentation of on Sept. 14, 2009, with financial statements that are free from material misstatement, whether due to fraud or error; DOE Secretary Angelo selecting and applying appropriate accounting policies; and making accounting estimates thatPERC are President Reyes, Milagros Reyes, DOE reasonable in the circumstances.

Auditors’ Responsibility

Asst. Secretary Mario Marasigan and PERC Vice President F.G. Delfin, Jr.

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to These renewable energy projects areof envisioned to provide long-term growth and revenues the entity’s preparation and fair presentation the financial statements in order to design audit for the Company while our core petroleum operations in Gabon, as well as oil exploration procedures that are appropriate in the circumstances, but not for the purpose of expressing an and on development projects in the internal Philippines, will sustain the Company in the near and opinion the effectiveness of here the entity’s control. medium-term. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. GABON OPERATIONS We believe that theand audit evidence have obtained is core sufficient and appropriate provide a basis Diligence luck paid off we handsomely for our business of exploringtoand producing for our audit opinion. oil in Gabon. Together with our joint venture (JV) partners, we developed three oil fields that have produced 49.9 million barrels since commercial production began in 2002. Yet, based on engineering studies of the reservoir behavior, our current oil fields can still yield over 50 million barrels.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

25,000

TOTAL

22,500 20,000 17,500

ETAME

BOPD

15,000

ETAME

12,500 10,000

AVOUMA

7,500 5,000

Jan-10

EBOURI

Jul-09

Jan-09

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

Jul-02

Jul-08

EBOURI

2,500

Production history of the Etame permit, Gabon.

Ebouri Field Put On-Line – A major milestone in our Gabon operation in 2009 was the commissioning of the Ebouri field, the third production field in our Etame block. The first production well, Ebouri-2H, flowed oil to the FPSO Petroleo Nautipa in January 2009 while Ebouri-3H went on stream in April 2009. This brought total production in early 2009 to nearly 25,000 bopd before problems in Ebouri-3H’s submersible pump caused Ebouri-3H output to decline and total production to hover around 22,000 bopd. A work-over of Ebouri-3H to repair its pump and increase its output is scheduled in early 2010. Seismic Studies of Prospects & Leads – As part of the JV’s continuing efforts to identify future production areas and increase our reserves, seismic acquisition, processing, and interpretation were conducted in 2009 covering several leads and prospects. In the eastern shallow-water part of our block, two very promising leads identified from 2D seismic data are Lead “N” that may hold as much as 28 mmbo of mean recoverable reserves and Lead “D” with potential recoverable reserves of 12 mmbo. To mature these leads, a new 3D seismic survey will be run in these shallow-water areas in 2010. If results are positive, these leads may then be included in the 2011 drilling program that will probe frontier areas far removed from the trend of the present producing fields. Higher priority, however, for future drilling is given to so-called near-field seismic prospects because they lie close to and can be tied to existing production fields and facilities. Two of the most promising near-field targets are SW Etame and Omangou (formerly called “J”). Both are located in about 80 m of water; SW Etame is 6 km southwest of the Etame FPSO while Omangou is located 4 km southeast of the Ebouri platform.

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines 891 0307 Due to Collectively, both prospects may hold recoverable reserves of morePhone: than (632) 30 mmbo. Fax: (632) 819 0872 these attractive features, a site survey for drillhole locations in both areas was conducted in www.sgv.com.ph 2009, with contingent exploration drilling set for 2010. BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1

Several leads have also been identified in the western, deeper-water portions of our INDEPENDENT REPORT Etame block.AUDITORS’ The Elili prospect, 24 km southwest of the Etame facility, is by far the biggest of the deep-water prospects identified. Thus, despite the acknowledged technical and financial challenges associated with deep-water oil field development, the potential yield of the Elili merits its the priority as of anDirectors exploration drilling target. Theprospect Stockholders and Board

PetroEnergy Resources Corporation of the Sixth Contract Period – Our Etame JV partnership, through our 7th Floor,Extension JMT Building ADBOperator Avenue, VAALCO Ortigas Center, City Gabon,Pasig Inc. successfully negotiated with the new Gabonese government for an extension of our Sixth Contract Period from July 2011 to July 2014. This three-year extension provides the JV with the near-term stability for our exploration and production We have audited the accompanying financial statements of PetroEnergy Resources Corporation, activities. Equally important as the extension is the approval given to the Etame consortium which comprise the statements of financial position as at December 31, 2009 and 2008, and the to retainofallincome, of the entire Etameofpermit area. Suchincome, approval is a major of achievement statements statements comprehensive statements changes in given equitythat and 50% of the contract area is typically relinquished by the sixth contract period. statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Redevelopment Planning – In December 2009 the Etame JV partners formed a technical Management’s Responsibility forthe theoilFinancial task force that will re-assess reservesStatements of the block, recommend improvements and modification in our drilling and production strategies, and craft an over-all long-term Management is responsible for the preparation and fair presentation of these financial statements in development that will optimize theReporting productive life of the oilfields. The Task Force comprising of accordance with Philippine Financial Standards. This responsibility includes: designing, geoscientists, reservoir engineers, drilling engineers, and economists from the technical staff implementing and maintaining internal control relevant to the preparation and fair presentation of of thestatements co-venturers working to access, compare, and evaluate various data, tools financial thathad are been free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are and facilities. reasonable in the circumstances. Auditors’ Responsibility Ebouri

Field Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable Etame assurance whether the financial statements are freeField from material misstatement. COM-1

EEBOM-3H Drain

EEBONM-1

EEBONM-1 ST-1

EEBOM-2H Northern Pilot Hole

EEBOM-2H Pilot Hole 2 EEBOM-2H Pilot Hole 1

LIM-1

ETNM-1

Ebouri Platform

Omangou Prospects performing

KOGM1

AMOM2 ET-5HiH

ET-4V

An audit involves procedures to obtain audit evidence about the amounts and disclosures SE Etame in the financial statements. The procedures selected depend onProspect the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to N. Tchibala fraud or error. In making those risk assessments, the auditors consider internal control relevant to SW Etame Prospect the entity’s preparation and fair presentation of the financial statements in order to design audit S. Tchibala Field of Etame procedures that are appropriate in the circumstances, but not for the purpose expressing Permit an Boundary opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. ET ET-6H

ET ET ET-6H

ET-1VA

OMBM1

SE Etame

OMBM2

ETSEM-1

MUKM-1

GMF2X

GMF1X

GMF3X

TBNM1

TBSM3

ETBSM-1H

TBSM2

TBSM4

ETBSM

GMA EAVOM

EAVOM-2H

TBSM1

-1

GMA1X

VSM-1

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. GBO-2

OMPM-1

TIYA-1

Elili Prospect

KALM-1

Location of producing oil fields and prospects in Etame permit, Gabon.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

An emerging consensus among Task Force members is for a synergistic approach whereby the expertise of the technical staff of all the co-venturers are tapped during the process of resource evaluation. It is intended to modify the present mode whereby plans and actions are presented by the Operator for discussion in a technical meeting before the final recommendation of a work program to the joint venture Operating Committee. 2010 Drilling Program–The Gabon joint venture will conduct a $100 million back-to-back drilling campaign beginning in March 2010. This will include the drilling of the third Ebouri production hole Ebouri-4H, the work-over of Ebouri3H, drilling of ET-7H production well, and the drilling of SE Etame exploration well. Two exploration prospects– Omangou and SW Etame–may also be drilled in 2010. The objectives of the drillings are to raise the production level to 30,000 barrels of oil per day and to find additional oil reserves that are within reach of the present production facilities.

The jack-up drilling rig, Sapphire Driller, has been contracted to undertake the 2010 drilling campaign in the Etame block commencing in the first week of March.

PHILIPPINE OIL PROJECTS Although the pace of our local oil exploration projects has been much slower compared to Gabon, there were nevertheless a few encouraging developments in our contract areas. SC-6A (Octon, northwest Palawan) – DOE granted in June 2009 the final 15-year extension of the SC-6A service contract bringing to 50 years the total contract term. The SC-6A consortium amended in November 2009 the farm-in agreement with Vitol GPC extending the latter’s farm-in option to December 31, 2010 or 14 days after DOE approval of the Galoc 2nd phase development, whichever occurs first. It may be recalled that Vitol GPC’s SC-6A farm-in option was tied to an envisioned Second Phase Development of the adjacent Galoc block. Vitol GPC also conducted, at its own cost, a seismic re-processing of the adjoining Octon and Galoc blocks. SC-14C1 (Galoc, northwest Palawan) – After a careful assessment of expected future output from the Galoc oil field relative to further financial requirements and the growing problems in the field’s operations, PERC with the approval of the DOE, proportionately reassigned its entire 1.03% interest to other consortium members. Under the agreement, the Company relinquishes its rights over the Galoc block in consideration for the joint venture partners’ reimbursement of costs incurred by the Company in the Galoc block.

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

Phone:several (632) 891 geological 0307 SC-14C2 (West Linapacan, northwest Palawan) – In SC-14C2, Fax: (632) 819 0872 and engineering studies were completed in 2009 by farminee Pitkinwww.sgv.com.ph Petroleum Plc. These include seismic reservoir characterization, sequence stratigraphic study, andBOA/PRC conceptual engineering Reg. No. 0001 SEC Accreditation No. subsea 0012-FR-1 design. Based on these studies, a production scheme is recommended entailing two wells completed to a common manifold and a riser back to a floating production unit. Pitkin is INDEPENDENT confident thatAUDITORS’ this schemeREPORT can tap the reservoir to yield 10,000-20,000 bopd. The first well, in which all JV partners except Nido Petroleum will be free-carried, can be drilled by the first quarter of 2011 with first oil expected by the second quarter of 2013.

The Stockholders and the Board of Directors SC-47 (offshoreCorporation Mindoro-Panay) – Progress in maturing our leads and prospects in SC-47 PetroEnergy Resources was also achieved in 7th Floor, JMT Building 2009. SC 47 operator, PNOC- Exploration Corporation (PNOC-EC), on of the otherCenter, consortium members Basic Energy and PERC, contracted CGG Veritas to ADBbehalf Avenue, Ortigas Pasig City undertake a 2D seismic survey in August, 2009. This program is part of the consortium’s Sub-phase 2 work commitment to the DOE which also includes drilling one exploration well. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 and 2008, and the CGG Veritas used the vessel M/V Pacific Sword to statements acquire nearly 1,100 line km of and 2D statements of income, statements of comprehensive income, of changes in equity seismic data. Because the vessel was hired when it was already in the Philippines for another statements of cash flows for each of the three years in the period ended December 31, 2009, and a project, the consortium savedpolicies significant mobilization andnotes. demobilization expenditures. summary of significant accounting and other explanatory Processing of the 2D data had been completed by Fairfield Vietnam and it is expected that the Management’s forbe the FinancialbyStatements analysis andResponsibility interpretation will completed the 3rd quarter of 2010. Management is responsible for the preparation and fair presentation of these financial statements in SC-51 Visayan Basin) – Another welcome development forincludes: our Philippine oil accordance with(Central Philippine Financial Reporting Standards. This responsibility designing, projects occurred in our SC-51 contract area. On May 29, preparation 2009, Executive Order (E.O) No. 10 implementing and maintaining internal control relevant to the and fair presentation of financial statements that are free from material misstatement, whether due to or error; was issued byfraud the Cebu provincial selecting and applying appropriate accounting policies; and making accountinglifting estimates are government the that Cease reasonable in the circumstances. and Desist Order (E.O No. 9) Sual, for oil exploration in the Argao Auditors’ Responsibility Pangasinan and Sibonga municipal waters it issuedbased in 2008. Consequently, Our responsibility is to express an opinion on these financial statements on our audits. We Maibarara, conducted our audits in accordance with Philippine Standards onDOE Auditing. Those standards require notified SC-51 Operator Laguna/Batangas that we comply with ethical requirements and plan and perform the audit to obtain reasonable NorAsian Energy Ltd on June 20, assurance whether the financial statements are free from material misstatement. SC-6A 2009 lifting the DOE moratorium Nabas, Octon on oil exploration activities on Aklan audit evidence An audit involves performing procedures to obtain about the amounts and disclosures area.judgment, SC-51’sincluding request in the financial the said auditor’s SC-14Cstatements. The procedures selected depend onthe for an 18-month whether extensiondue of the West of the risks of material misstatement of the financial the assessment statements, to SC-51 fraud or Linapacan error. In making those risk assessments, the auditors consider internal control relevant to Third Exploration Sub-Phase due Visayan the entity’s preparation and fair presentation of the financial statements in order to design audit Basin to the work stoppage was also procedures that are appropriate in the circumstances, but not forgranted the purpose of DOE expressing an28, by the on July SC-47 opinion on the effectiveness of the entity’s internal control. Offshore 2009. NorAsian Energy is now An audit also includes evaluating the appropriateness of accounting policies used and the Mindoro closely with the theoverall DOE reasonableness of accounting estimates made by management,working as well as evaluating Cebu regional office to obtain presentation of the financial statements. local community support for the We believe that the audit evidence we have obtained is sufficientresumption and appropriate provide a basis of thetoenvironmental for our audit opinion. survey of the planned offshore wellsite to allow drilling of Argao-1 Location of PERC’s Philippine petroleum, wind, and geothermal projects. in late 2010.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

RENEWABLE ENERGY Ensuring the continued supply of clean and renewable energy has emerged as one of the major global imperatives today. The Philippines has acted on this imperative by passing the 2008 Renewable Energy Law that provides several fiscal and non-fiscal incentives to private industries to harness renewable energy. PERC has prepared itself for this new business by assiduously acquiring over the past two years the technical competence and professional networks critical to this venture. Wind Power Projects – PERC’s wind energy service contract in Sual, Pangasinan covers 1,700 hectares of mostly public lands in the northern foothills of the Zambales Range. The contract area overlooks Lingayen Gulf to the northeast and is on the path of high-voltage transmission lines from the Sual coal-fired power plant 8 km to the north. Our Nabas contract area, located near the northwestern tip of Panay island, covers 2,000 hectares of public and private lands in rolling terrain. It lies about 6 km southeast of Caticlan and electricity-deficient Panay and Boracay islands are natural markets of future power from Nabas.

Installation of 60-m wind meteorological mast in Sual, Pangasinan, February, 2010.

To fulfill our DOE work commitment to gather wind data for a period of 18-24 months in both sites, PERC acquired two new 60-m meteorological masts in November, 2009 from US-based NRG Systems. On February 5, 2010 the first mast was installed in Sual, Pangasinan while the second mast was erected in Nabas on February 18. Data gathered during this pre-development phase will be used to estimate the electric power yield and to determine the appropriate sites of individual wind turbine-generators for a 30 MW power plant on either project.

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

INDEPENDENT AUDITORS’ REPORT Maibarara Geothermal Project – Our steady expansion into renewable energy took another positive turn with the acquisition of the Maibarara geothermal service contract. Of the 10 geothermal sites auctioned off by the DOE last October 2009, Maibarara is arguably the best site because prior exploration drilling by Unocal in 1977-1983 had proven the presence The and Stockholders andofthe Board of Directors initial extent a commercial geothermal reservoir. Aside from the reduced exploration PetroEnergy Resources Corporation risk, Maibarara’s location near high power demand centers of Metro Manila and southern 7th Floor, JMT Building Tagalog and its proximity to existing high-voltage transmission facilities further enhances the ADBvalue Avenue, Ortigas Center, Pasig City of the project. PERC’s commitment to the DOE is for an integrated steamfield and power plant development We have audited the accompanying financial statements of PetroEnergy Resources Corporation, with the first 20 MW to be commissioned by the last quarter of 2013. The first two years of which comprise the statements of financial position as at December 31, 2009 and 2008, and the this accelerated programofwill entail the acquisition of statements all necessary permits statements of income,work statements comprehensive income, of environmental changes in equity and and clearances, rehabilitation drillperiod pads,ended work-over of 6 existing wells, statements of cash flows for eachof of existing the threeroads yearsand in the December 31, 2009, and a conduct of extended flow-testing of wells, ofnotes. detailed engineering design of summary of significant accounting policies and and otherpreparation explanatory the pipeline system. Management’s Responsibility for the Financial Statements We intend to pursue the Maibarara project as a joint venture with other credible upstream players the capital PERC andand to draw the technicalofand non-technical resources in Managementtoisreduce responsible for risk the to preparation fair on presentation these financial statements of these with entities. WhileFinancial negotiations are on-going with This at least two potential partners in the accordance Philippine Reporting Standards. responsibility includes: designing, Maibararaand joint venture, PERC initiated discussions with several local and foreign implementing maintaining internalhas control relevant to the preparation and fair presentation of contractors who that can are contribute to speedy implementation. financial statements free from materialproject misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. LOOKING AHEAD

Auditors’PERC’s Responsibility continuing achievements in the oil sector owe much to the dedication and hardwork of its officers and employees and to the support that its shareholders have given to Our the responsibility is toand express an opinion on these based on our audits. We Management staff over the years. Thisfinancial support statements and trust will be even more needed conducted our audits in accordance with Philippine Standards on Auditing. Those standards require over the coming years when our renewable energy programs go into high gear and our Gabon that project we comply with ethical requirements plan and the audit to obtain reasonable will expands to its full productionand potential. Weperform are confident that our shareholders assurance whether the financial statements are free from material misstatement. provide us with that trust, support, and understanding. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit Rizalino S. Navarro V. Reyes procedures that are appropriate in the circumstances, but not forMilagros the purpose of expressing an Chairman President opinion on the effectiveness of the entity’s internal control. (non-executive) An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

Financial Highlights

(In thousand US dollars, except crude oil price, earnings per share, book value per share and ratio values)

2009 Assets

Change

22,085

20,836

5.99%

858

762

12.60%

21,227

20,074

5.74%

Oil Revenue

8,682

10,905

-20.39%

Operating Income

5,431

6,411

-15.29%

Net Income

1,723

2,243

-23.18%

Book Value per Share

0.155

0.147

5.44%

Earnings per Share

0.013

0.016

-18.75%

Average Crude Oil Price

$59.38

$92.72

-35.96%

Current Ratio

11.39:1

8.47:1

.040:1

.038:1

Liabilities Stockholder's Equity

Debt-to Equity Ratio

2008

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

23 February 2010

BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Statement of Management's Responsibility

for Financial Statements INDEPENDENT AUDITORS’ REPORT

The management of PetroEnergy Resources Corporation is responsible for all information Theand Stockholders and thecontained Board of in Directors representations the financial statements for the years ended December 31, PetroEnergy Resources Corporation 2009 and 2008. The financial statements have been prepared in conformity with generally 7th Floor, JMTaccounting Building principles in the Philippines and reflect amounts that are based on the accepted ADB Avenue, Ortigas Center, Pasig City best estimates and informed judgment of management with an appropriate consideration to materiality.

We have audited the accompanying financial statements of PetroEnergy Resources Corporation, In comprise this regard, a systemasofataccounting reporting provides which themanagement statements ofmaintains financial position December and 31, 2009 and which 2008, and the for the necessary internal controls to ensure that transactions are properly authorized statements of income, statements of comprehensive income, statements of changes in equityand and recorded, assets are for safeguarded unauthorized use or disposition and31, liabilities are a statements of cash flows each of theagainst three years in the period ended December 2009, and recognized. The management discloses to the company's summary of significant accounting likewise policies and other explanatory notes.audit committee and to its external auditor; (i) all significant deficiencies in the design or operation of internal controls that could adversely affect itsfor ability to record, Statements process, and report financial data; (ii) material Management’s Responsibility the Financial weaknesses in the internal controls; and (iii) any fraud that involves management or other employeesiswho exercisefor significant roles in and internal controls. Management responsible the preparation fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, The Boardand of Directors reviews the control financial statements such statements are approved implementing maintaining internal relevant to thebefore preparation and fair presentation of financial statements free from of material misstatement, whether due to fraud or error; and submitted tothat the are stockholders the Company. selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. SyCip Gorres Velayo & Co, the independent auditors and appointed by the stockholders, has examined the financial statements of the Company in accordance with generally accepted Auditors’ Responsibility auditing standards in the Philippines and has expressed its opinion on the fairness of presentation upon completion of such examination, in its report to the Board of Directors and Our stockholders. responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud orRizalino error. InS. making those risk assessments, auditors consider internal relevant to Navarro Milagros the V. Reyes Yvonnecontrol S. Yuchengco the entity’s preparation and fair presentation ofPresident the financial statements in order Treasurer to design audit Chairman of the Board procedures(non-executive) that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue S yCMakati ip Gorres G orres & Co. C o. SyCip 1226 City Velayo & 6760 Ayala Avenue Philippines 1226 Makati City Phone: (632) 891 0307 Philippines Fax: (632) 819 0872 Phone: (632) 891 891 0307 0307 Phone: (632) www.sgv.com.ph Fax: (632) 819 819 0872 0872 Fax: (632) www.sgv.com.ph www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 BOA/PRC Reg. No. No. 0001 0001 BOA/PRC Reg. SEC Accreditation No. No. 0012-FR-1 0012-FR-1

INDEPENDENT AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors PetroEnergy Resources Corporation The Stockholders and the Board of Directors 7th Floor, JMT Resources Building Corporation PetroEnergy ADB Ortigas Center, Pasig City 7th Avenue, Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise thethe statements of financial position as at December 31, 2009 and 2008, and the We have audited accompanying financial statements of PetroEnergy Resources Corporation, statements of income, statementsofoffinancial comprehensive statements changes in equity which comprise the statements position income, as at December 31, of 2009 and 2008, and and the statements flowsstatements for each ofof the three years in income, the period ended December 31,in2009, and a statementsofofcash income, comprehensive statements of changes equity and summary of significant accounting and other statements of cash flows for eachpolicies of the three yearsexplanatory in the periodnotes. ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance withisPhilippine Financial Reporting Standards. This responsibility designing, in Management responsible for the preparation and fair presentation of theseincludes: financial statements implementing and maintaining internal Reporting control relevant to the preparation and fairincludes: presentation of accordance with Philippine Financial Standards. This responsibility designing, financial statements that are freeinternal from material due and to fraud or error; implementing and maintaining control misstatement, relevant to thewhether preparation fair presentation of selecting applyingthat appropriate accounting policies; and making accounting estimates that are financialand statements are free from material misstatement, whether due to fraud or error; reasonable in the circumstances. selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits with Philippine Standards on Auditing.based Thoseonstandards require Our responsibility is in to accordance express an opinion on these financial statements our audits. We that we comply ethical requirements plan and perform the audit to obtain reasonable conducted ourwith audits in accordance withand Philippine Standards on Auditing. Those standards require assurance whether theethical financial statementsand areplan free and fromperform materialthe misstatement. that we comply with requirements audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inAn theaudit financial statements. The procedures depend on theabout auditor’s judgment, including involves performing procedures toselected obtain audit evidence the amounts and disclosures the the risks ofThe material misstatement ofdepend the financial whether due to in assessment the financial of statements. procedures selected on thestatements, auditor’s judgment, including fraud or error. In making those assessments, the auditors consider internal control relevant to the assessment of the risks of risk material misstatement of the financial statements, whether due to the entity’s preparation andthose fair presentation of the financial statements ininternal order tocontrol designrelevant audit to fraud or error. In making risk assessments, the auditors consider procedures are appropriate the circumstances, but not statements for the purpose of expressing an the entity’sthat preparation and fairinpresentation of the financial in order to design audit opinion on thethat effectiveness of theinentity’s internal control. procedures are appropriate the circumstances, but not for the purpose of expressing an An audit also includes evaluating theentity’s appropriateness of accounting policies used and the opinion on the effectiveness of the internal control. reasonableness of accounting estimates made by management, as well as evaluating An audit also includes evaluating the appropriateness of accounting policies used andthe theoverall presentation of theoffinancial statements. reasonableness accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forWe ourbelieve audit opinion. that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*, *SGVMC113435*,

A member of Ernst & Young Global Limited A member firm firm of Ernst & Young Global Limited

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Opinion INDEPENDENT AUDITORS’ REPORT In our opinion, the financial statements present fairly, in all material respects, the financial position of PetroEnergy Resources Corporation as of December 31, 2009 and 2008, and its financial performance and its cash of the three years in the period ended December 31, 2009 The Stockholders and the flows Boardfor of each Directors in accordance with Philippine Financial Reporting Standards. PetroEnergy Resources Corporation 7th Floor, JMT Building Without qualifying our Center, opinion,Pasig we draw ADB Avenue, Ortigas Cityattention to Note 8 to the financial statements. The suspension of the production activities in the West Linapacan Oilfield raises uncertainties as to the profitability of the petroleum operations. In addition, the farm-out of the Company’s participating interest Servicethe Contract No. 14 may resultstatements in a potential in its share of future revenues. We haveinaudited accompanying financial of reduction PetroEnergy Resources Corporation, The profitability of petroleum operations and the full recovery of unamortized cost of wells, platforms which comprise the statements of financial position as at December 31, 2009 and 2008, and the and other facilities and the deferred oil exploration costs (Note 9) incurred in connection with statements of income, statements of comprehensive income, statements of changes in equitythe and Company’s of participation acquisition and years exploration petroleum are2009, dependent statements cash flowsin forthe each of the three in the of period endedconcessions December 31, and a upon additional discoveries of oil inpolicies commercial quantities and thenotes. success of future development summary of significant accounting and other explanatory thereof. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in SYCIP GORRES VELAYO Financial & CO. Reporting Standards. This responsibility includes: designing, accordance with Philippine implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are Cyril JasmininB.the Valencia reasonable circumstances. Partner CPA Certificate No. 90787 Auditors’ Responsibility SEC Accreditation No. 0782-A Tax responsibility Identification No. Our is to162-410-623 express an opinion on these financial statements based on our audits. We PTR No. 2087579, January 4, 2010, with Makati City Standards on Auditing. Those standards require conducted our audits in accordance Philippine that we comply with ethical requirements and plan and perform the audit to obtain reasonable February 23, 2010 the financial statements are free from material misstatement. assurance whether An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

PETROENERGY RESOURCES CORPORATION STATEMENTS OF FINANCIAL POSITION (In U.S. Dollars) INDEPENDENT AUDITORS’ REPORT

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

December 31 2009 2008

ASSETS The Stockholders and the Board of Directors Current Assets PetroEnergy Resources Corporation Cash andJMT cash equivalents (Notes 4 and 20) $1,889,779 $1,348,609 7th Floor, Building Financial assets at fair value through profit and loss ADB Avenue, Ortigas Center, Pasig City (Notes 5 and 20) 2,048,418 573,308 Receivables - net (Notes 3, 6 and 20) 1,573,510 1,291,148 Crude inventory 3) 308,939 We haveoilaudited the (Note accompanying financial statements of PetroEnergy131,303 Resources Corporation, Prepaid expenses and other current assets (Notes 7 and 20) 196,890 204,197 which comprise the statements of financial position as at December 31, 2009 and 2008, and the Total Current Assets 5,839,900 3,726,201 statements of income, statements of comprehensive income, statements of changes in equity and Noncurrent Assets statements of cash flows for each of the three years in the period ended December 31, 2009, and a Propertyofand equipment - net (Notes 3 and 8) other explanatory notes. 12,052,491 12,578,532 summary significant accounting policies and Deferred oil exploration costs (Notes 3 and 9) 4,073,670 4,499,993 Investment property - net (Notes andFinancial 10) 31,417 31,417 Management’s Responsibility for3 the Statements Deferred tax assets - net (Notes 3 and 16) 87,365 − Management responsibleAssets for the preparation and fair presentation of these financial statements TotalisNoncurrent 16,244,943 17,109,942in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, $22,084,843 $20,836,143 implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; LIABILITIES AND EQUITY selecting and applying appropriate accounting policies; and making accounting estimates that are Current Liabilities reasonable in the circumstances. Accounts payable and accrued expenses (Notes 12, 14 and 20) $426,734 $440,082 Auditors’ Responsibility Income tax payable (Note 14) 85,771 − Total Current Liabilitiesan opinion on these financial statements 512,505 440,082 Our responsibility is to express based on our audits. We Noncurrent conducted ourLiabilities audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical obtain reasonable Accrued retirement liabilityrequirements (Notes 3, 14 and and plan 15) and perform the audit to 45,409 38,737 Asset retirement (Notes 3, 13 and 299,967 181,061 assurance whetherobligation the financial statements are14) free from material misstatement. Deferred tax liabilities - net (Notes 3, 14 and 16) − 102,682 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Total Noncurrent Liabilities 345,376 322,480 in the financial statements. The procedures selected depend on the auditor’s judgment, including Total Liabilities 857,881 762,562 the assessment of the risks of material misstatement of the financial statements, whether due to Equity (Note 14) fraud or error. In making those risk assessments, the auditors consider internal control relevant to Capital stock - $0.0245 par value the entity’s preparation and fair presentation of the financial statements in order to design audit Authorized - 330,000,000 shares procedures appropriate in the circumstances, of expressing an Issuedthat andare outstanding - 136,912,110 shares but not for the purpose 3,358,068 3,358,068 opinion on the effectiveness of the entity’s internal control. Additional paid-in capital 13,390,875 13,390,875 An audit also includes evaluating the appropriateness of accounting policies used and the Retained earnings reasonableness of accounting estimates made by management, as well as evaluating the overall Appropriated 2,055,555 2,055,555 presentation of the financial statements. Unappropriated 2,422,464 1,269,083 Total Equity 21,226,962 20,073,581 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis $22,084,843 $20,836,143 for our audit opinion. See accompanying Notes to Financial Statements.

*SGVMC113435* *SGVMC113435*, ,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

PETROENERGY RESOURCES CORPORATION STATEMENTS OF INCOME (In U.S. Dollars) INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of Directors OIL REVENUES PetroEnergy Resources Corporation 7th Floor,AND JMTEXPENSES Building COSTS ADB Avenue, Ortigas Center, Pasig(Note City 17) Oil production operating expenses

BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Years Ended December 31 2009 2008 2007 $8,682,063

$10,905,157

$8,482,118

3,250,940 4,494,522 3,270,740 Depletion, depreciation and amortization (Notes 8 and 10) 1,934,946 1,774,329 1,617,393 We haveand audited the accompanying statements1,239,332 of PetroEnergy Resources Corporation, General administrative expensesfinancial (Note 18) 1,050,079 881,930 which comprise the statements of financial position as at6,425,218 December 31,7,318,930 2009 and 2008,5,770,063 and the statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a OTHER INCOME (CHARGES) summary of significant accounting policies and other explanatory notes. Interest income 91,892 94,986 52,694 Net unrealized foreign exchange gain (loss) 20,637 (155,554) 81,478 Management’s Responsibility for the Financial Statements Net gain (loss) on fair value changes on financial assets at fair value through profit and loss Management is responsible for the preparation and fair presentation of these financial statements in (Note 5) 9,786 (30,913) 3,713 accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Accretion expense (Note 13) (67,860) (40,277) (12,474) implementing and maintaining internal control relevant to the preparation and fair presentation of Miscellaneous income 4,180 5,606 375 financial statements that are free from material misstatement, whether due to fraud or error; 58,635 (126,152) 125,786 selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. INCOME BEFORE INCOME TAX 2,315,480 3,460,075 2,837,841 Auditors’ Responsibility PROVISION FOR INCOME TAX (Note 16)

592,701

1,217,371

769,036

Our responsibility is to express an opinion on these financial statements based on our audits. We NET INCOME $1,722,779 $2,242,704 $2,068,805 conducted our (Note audits21) in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable Basic/Diluted Earnings Per Share (Note 21) $0.013 misstatement. $0.016 $0.015 assurance whether the financial statements are free from material An involves performing See audit accompanying Notes to Financial procedures Statements. to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

PETROENERGY RESOURCES CORPORATION STATEMENTS OF COMPREHENSIVE INCOME (In U.S. Dollars) INDEPENDENT AUDITORS’ REPORT

The Stockholders andTHE the Board NET INCOME FOR YEARof Directors PetroEnergy Resources Corporation 7th Floor, JMT Building OTHER COMPREHENSIVE INCOME ADB Avenue, Ortigas Center, Pasig City TOTAL COMPREHENSIVE INCOME

BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Years Ended December 31 2009 2008 2007 $1,722,779

$2,242,704

$2,068,805

−

$1,722,779

$2,242,704

$2,068,805

We have audited the accompanying financial statements of PetroEnergy Resources Corporation, See accompanying Notes to Financial Statements. which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435*, ,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

PETROENERGY RESOURCES CORPORATION STATEMENTS OF CHANGES IN EQUITY (In U.S. Dollars) INDEPENDENT AUDITORS’ REPORT

The Stockholders the Board Directors CAPITAL STOCKand - $0.0245 par of value (Note 14) PetroEnergy Resources Corporation Authorized - 330,000,000 shares 7th Floor, IssuedJMT and Building outstanding - 136,912,110 shares ADB Avenue, Ortigas Pasig City in 2009, 2008 Center, and 2007

BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Years Ended December 31 2009 2008 2007

$3,358,068

ADDITIONAL PAID-IN CAPITAL 13,390,875 13,390,875 13,390,875 We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise theRETAINED statementsEARNINGS of financial position as at December 31, 2009 and 2008, and the APPROPRIATED statements of income, statements of comprehensive income, statements 563,550 of changes in equity and Balance at beginning of year 2,055,555 563,550 statements of cash flows for each of the three years in the period ended December 31, 2009, and a Transfer from unappropriated retained earnings summary of significant accounting policies and other explanatory notes. (Note 14) – 1,492,005 – Balance at end of year 2,055,555 Management’s Responsibility for the Financial Statements

2,055,555

563,550

UNAPPROPRIATED RETAINED EARNINGS Management is responsible for the preparation and fair presentation of these financial statements in Balance at beginning of year 1,269,083 2,127,369 1,224,882 accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Net income 1,722,779 2,242,704 2,068,805 implementing and maintaining internal control relevant to the preparation and fair presentation of Cash dividends (Note 14) (569,398) (1,608,985) (1,166,318) financial statements that are free from material misstatement, whether due to fraud or error; Transfer to appropriated retained earnings selecting and applying appropriate accounting policies; and making accounting estimates that are (Note 14) – (1,492,005) – reasonable in the circumstances. Balance at end of year 2,422,464 1,269,083 2,127,369 $21,226,962 $20,073,581 $19,439,862 Auditors’ Responsibility Our responsibility is to toFinancial express an opinion on these financial statements based on our audits. We See accompanying Notes Statements. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

PETROENERGY RESOURCES CORPORATION STATEMENTS OF CASH FLOWS (In U.S. Dollars)

BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

INDEPENDENT AUDITORS’ REPORT Years Ended December 31 2009

2008

2007

$2,315,480

$3,460,075

$2,837,841

CASH FLOWS FROM OPERATING ACTIVITIES

The Stockholders and the Board of Directors Income before income tax PetroEnergy Resources Corporation Adjustments for: 7th Floor, JMT Building and amortization (Note 8) Depletion, depreciation ADB Avenue, Ortigas Center, Pasig City Accretion expense (Note 13)

1,934,946 67,860 (91,892)

1,774,329 40,277 (94,986)

1,617,393 12,474 (52,694)

4,192,153

5,366,162

4,329,823

Interest income Net loss (gain) on fair value changes on financial assets at fair We have value audited theprofit accompanying financial statements of PetroEnergy Resources (9,786) through and loss (Note 5) 30,913Corporation, (3,713) whichNet comprise the statements of financial position as at December 31, 2009 and 2008, and the (20,637) unrealized foreign exchange (gain) loss 155,554 (81,478) statements income, statements comprehensive Loss on of sale of financial assets at fair of value through profit and income, statements of changes in equity and statements of cash flows for each of the three years in the period 5,467 ended December 31, loss – 2009, and a – summary of significant accounting policies and other explanatory notes. (9,285) Gain on sale of property and equipment – – Operating income before working capital changes

Management’s Responsibility for the Financial Statements Changes in operating assets and liabilities: Decrease (increase) in:

Management is responsible for the preparation and fair presentation of these financial in (236,284) Receivables 221,725 statements (883,733) accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, 177,636 Crude oil inventory 183,046 76,723 implementing and maintaining control relevant to the preparation and fair presentation of (12,894) Prepaid expenses and otherinternal current assets (69,418) (46,683) financial statements are free fromand material misstatement, whether or error; 117,646 (28,624) due to fraud Increase (decrease)that in accounts payable accrued expenses (175,717) selecting and applying appropriate accounting policies; and making accounting estimates that3,593,776 are 4,091,987 Cash generated from operations 5,525,798 reasonable in the circumstances. 45,814 Interest income received 82,406 50,792 Income taxes paid

Auditors’ Responsibility Net cash provided by operating activities

(676,966) 3,460,835

(1,583,993) 4,024,211

(657,942) 2,986,626

CASH FLOWS FROM INVESTING ACTIVITIES

Our responsibility is to express an opinion on these financial statements based on our audits. We Acquisitions of: conducted our audits in accordance with Philippine Standards on Auditing. Those standards require (109,649) Property and equipment (Note 8) (204,506) (280,830) that we comply with ethical requirements and plan and perform the audit to obtain reasonable (1,471,995) Financial assets at fair value through profit and loss (537,782) – assurance whether the financial statements are free from material misstatement. Disposals of: Property and equipment

821,838

44,931

–

2,314,465

1,485,016

An audit involves performing procedures to obtain audit evidence 1,551 about the amounts–and disclosures Financial assets at fair value through profit and loss – inIncrease the financial statements. The procedures selected depend on the auditor’s(2,689,895) judgment, including (1,634,441) in deferred oil exploration costs (858,437) the assessment of the risks of material misstatement of the financial statements, whether due to (2,392,696) Net cash used in investing activities (3,387,252) (1,139,267) fraud or error. In making those risk assessments, the auditors consider internal control relevant to CASH FLOWS FROM FINANCING ACTIVITY the entity’s preparation and fair presentation of the financial statements in order to design audit (549,285) Dividends paid (1,577,466) (1,090,308) procedures that are appropriate in the circumstances, but not for the purpose of expressing an EFFECT OF FOREIGN EXCHANGE RATE CHANGES IN CASH opinion on the effectiveness of the entity’s internal control. AND CASH EQUIVALENTS 22,316 (25,349) 72,398 An audit also includes evaluating the appropriateness of accounting policies used and the NET INCREASE (DECREASE) IN CASH AND reasonableness of accounting estimates made by management, as well as evaluating the overall CASH EQUIVALENTS 541,170 (965,856) 829,449 presentation of the financial statements. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

1,348,609

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4)

$1,889,779

We believe that the audit evidence we have obtained is sufficient and for our audit opinion.

$1,348,609 appropriate to provide$2,314,465 a basis

See accompanying Notes to Financial Statements.

*SGVMC113435* *SGVMC113435*, ,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

-1PETROENERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (In U.S. Dollars) INDEPENDENT AUDITORS’ REPORT

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

1. Corporate Information The Stockholders and the Board of Directors a. Organization PetroEnergy Resources Corporation PetroEnergy Resources Corporation (the Company) was incorporated in the 7th Floor, JMT Building Philippines in 29,City 1994 and started commercial operations in 1995. The ADB Avenue, Ortigas September Center, Pasig Company is engaged in oil and mineral exploration and development. The registered office address of the Company is 7th Floor, JMT Building, ADB Avenue, Ortigas Center, Pasig City. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 and 2008, and the Theof Company’s shares of stocks are listed and are currently trading at the Philippine statements income, statements of comprehensive income, statements of changes in equity and Stock Exchange. statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. On July 22, 2009, the Board of Directors (BOD) and Stockholders approved the amendment of articles offor incorporation of the Company to include the business of Management’s Responsibility the Financial Statements generating power from conventional sources such as coal, fossil fuel, natural gas, nuclear other viable sources of power renewable such as, but Management is and responsible for the preparation andand fairfrom presentation of sources these financial statements in not limited to, biomass, hydro,Reporting solar, wind, geothermal, and suchincludes: other designing, accordance with Philippine Financial Standards. Thisocean responsibility renewable sources of power. implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; b. Wind Contract (WESC)policies; and making accounting estimates that are selecting and Energy applyingService appropriate accounting On September 14, 2009, the Company was awarded by the Department of Energy reasonable in the circumstances. (DOE) two (2) WESC covering the areas of Sual, Pangasinan and Nabas, Aklan (see Note 8). These service contracts were awarded pursuant to Republic Act 9513, Auditors’ Responsibility otherwise known as the “Renewable Energy Act of 2008”. Our responsibility is to express an opinion on these financial statements based on our audits. We As of 31, 2009, the Company is still in the pre-development stage of the require conducted ourDecember audits in accordance with Philippine Standards on Auditing. Those standards wherein various studies are made to assess that we projects comply with ethical requirements andbeing plan and perform the their auditfeasibility. to obtain reasonable assurance whether the financial statements are free from material misstatement. c. Renewable Energy Act of 2008 January 30, 2009,procedures Republic Act 9513, Anevidence Act Promoting Development, An auditOn involves performing to No. obtain audit about the amounts and disclosures Utilization and Commercialization of Renewable Energy and for Otherincluding in the financial statements. The procedures selected depend onResources the auditor’s judgment, Purposes, shall knownmisstatement as the “Renewable Energy Act of 2008” (the Act),due to the assessment of which the risks of be material of the financial statements, whether The Act to (a) accelerate the exploration and development of to fraud orbecame error. Ineffective. making those riskaims assessments, the auditors consider internal control relevant renewable energy such as,ofbut limitedstatements to, biomass, hydro, the entity’s preparation andresources fair presentation thenot financial in solar, order wind, to design audit geothermal ocean energy including to achieve energy an procedures that are and appropriate in the sources, circumstances, buthybrid not forsystems, the purpose of expressing throughofthe of sustainable opinion self-reliance, on the effectiveness theadoption entity’s internal control.energy development strategies to the country’s dependence on fossil fuels thereby policies minimize the and country’s An auditreduce also includes evaluating the appropriateness of and accounting used the exposureoftoaccounting price fluctuations in the international markets,asthe effects of which spiral reasonableness estimates made by management, well as evaluating the overall downoftothe almost all sectors of the economy; (b) increase the utilization of renewable presentation financial statements. energy by institutionalizing the development of national and local capabilities in the use of renewable energy systems, efficient and We believe that the audit evidence we and havepromoting obtained its is sufficient and cost-effective appropriate tocommercial provide a basis application by providing fiscal and non-fiscal incentives; (c) encourage the development for our audit opinion. and utilization of renewable energy resources as tools to effectively prevent or reduce

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harmful emissions and thereby balance the goals of economic growth and development BOA/PRC Reg. No. 0001 SEC necessary Accreditation No. 0012-FR-1 with the protection of health and environment; and (d) establish the infrastructure and mechanism to carry out mandates specified in the Act and other laws. AUDITORS’ REPORT INDEPENDENT As provided for in the Act, Renewable Energy (RE) developers of RE facilities, including hybrid systems, in proportion to and to the extent of the RE component, for both power applications, as duly certified by the DOE, in consultation The Stockholders andand thenon-power Board of Directors with the PetroEnergy Resources Corporation of Investments (BOI), shall be entitled to the following incentives, among others: 7th Floor,Board JMT Building

ADB Avenue, Ortigas Center, Pasig City i. Income Tax Holiday (ITH) - For the first seven (7) years of its commercial operations, the duly registered RE developer shall be exempt from income taxes levied the National Government; We have audited theby accompanying financial statements of PetroEnergy Resources Corporation, ii. Duty-free Importation of RE Machinery, and31, Materials - Within which comprise the statements of financial position asEquipment at December 2009 and 2008, the andfirst the ten (10) years upon issuance of a certification of an RE developer, the importation statements of income, statements of comprehensive income, statements of changes in equity and machinery equipment, and materials parts thereof, including statements of of cash flows forand each of the three years in theand period ended December 31,control 2009, and a and communication equipment, shall not be subject to tariff duties; summary of significant accounting policies and other explanatory notes. iii. Special Realty Tax Rates on Equipment and Machinery - Any law to the contrary notwithstanding, andFinancial other taxes on civil works, equipment, machinery, and Management’s Responsibilityrealty for the Statements other improvements of a registered RE developer actually and exclusively used for REresponsible facilities shall not preparation exceed one and and fair a half percent (1.5%) of their original cost Management is for the presentation of these financial statements in less accumulated normal depreciation or net book value; accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, iv. Net Loss Carryover - the of the REfair developer duringof implementing and Operating maintaining internal control(NOLCO) relevant to theNOLCO preparation and presentation the first three (3) years from the start of commercial operation which had not financial statements that are free from material misstatement, whether due to fraud or error;been offset as deduction from gross and income shallaccounting be carried estimates over as that are selecting and previously applying appropriate accounting policies; making deduction from gross income for the next seven (7) consecutive taxable years reasonable in the circumstances. immediately following the year of such loss; Corporate Tax Rate - After seven (7) years of ITH, all RE developers shall pay a Auditors’v.Responsibility corporate tax of ten percent (10%) on its net taxable income as defined in the National Internal Revenue Code of 1997, as amended by Republic 9337;We Our responsibility is to express an opinion on these financial statements based onAct ourNo. audits. vi. Accelerated Depreciation If, and only if, an RE project fails to receive an ITH conducted our audits in accordance with Philippine Standards on Auditing. Those standards require before full operation, it may and apply forand accelerated depreciation in its tax books and that we comply with ethical requirements plan perform the audit to obtain reasonable be taxed based on such; assurance whether the financial statements are free from material misstatement. vii. Zero Percent VAT Rate - The sale of fuel or power generated from renewable sources of energy shall be subject zero evidence percent (0%) VAT; An audit involves performing procedures to obtaintoaudit about the amounts and disclosures viii. Cash Incentive of RE Developers for Missionary Electrification An RE developer, in the financial statements. The procedures selected depend on the auditor’s- judgment, including established after the effectivity of the Act, shall be entitled to a cash generationthe assessment of the risks of material misstatement of the financial statements, whether due to incentive rate generated, equivalent to fiftycontrol percent (50%) to fraud or error. based In making thoseper riskkilowatt-hour assessments, the auditors consider internal relevant of the universal for power needed to service missionary areas whereaudit it the entity’s preparation and faircharge presentation of the financial statements in order to design operates the same; procedures that are appropriate in the circumstances, but not for the purpose of expressing an ix.theTax Exemptionofofthe Carbon Credits - All proceeds from the sale of carbon emission opinion on effectiveness entity’s internal control. credits shall be exempt from any and all taxes; and policies used and the An audit also includes evaluating the appropriateness of accounting x. Tax Credit on Domestic Capital Equipment and Services A tax credit equivalent reasonableness of accounting estimates made by management, as well- as evaluating the overall to one hundred percent (100%) of the value of the value-added tax and custom presentation of the financial statements. duties that would have been paid on the RE machinery, equipment, materials and parts itemswe been imported shall be given and to anappropriate RE operating contracta basis We believe that the had auditthese evidence have obtained is sufficient to provide holder who purchases machinery, equipment, materials, and parts from a domestic for our audit opinion. manufacturer for purposes set forth in this Act.

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Accreditation No. 0012-FR-1 RE developers and local manufacturers, fabricators and suppliers of SEC locally-produced RE equipment shall register with the DOE, through the Renewable Energy Management Bureau (REMB). Upon registration, INDEPENDENT AUDITORS’ REPORT a certification shall be issued to each RE developer and local manufacturer, fabricator and supplier of locally-produced renewable energy equipment to serve as the basis of their entitlement to the incentives provided for in the Act. All certifications required to qualify RE developers to avail of the incentives provided for under the Act be issued by the DOE through the REMB. The Stockholders andshall the Board of Directors The accompanying financial statements were approved and authorized for issue by the PetroEnergy Resources Corporation BOD on February 23, 2010. 7th Floor, JMT Building

ADB Avenue, Ortigas Center, Pasig City

2. Summary of Significant Accounting Policies We have audited the accompanying financial statements of PetroEnergy Resources Corporation, Basis of Preparation which comprise the statements of financial position as at December 31, 2009 and 2008, and the The accompanying financial statements of the Company been prepared on in a equity and statements of income, statements of comprehensive income,have statements of changes historical cost basis, except for financial assets at fair value through profit and loss statements of cash flows for each of the three years in the period ended December 31, (FVPL) 2009, and a and crude oil inventory that have been and measured at fair value.notes. The financial statements are summary of significant accounting policies other explanatory presented in the Company’s functional currency which is the United States (U.S.) Dollar ($). Responsibility for the Financial Statements Management’s Statementisofresponsible Compliancefor the preparation and fair presentation of these financial statements in Management The financial statements of the Company have been prepared in accordance with designing, accordance with Philippine Financial Reporting Standards. This responsibility includes: Philippine Financial Reporting Standards (PFRS). implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; Changes in Accounting Policies and Disclosures selecting and applying appropriate accounting policies; and making accounting estimates that are The accounting policies adopted are consistent with those of the previous financial year, reasonable in the circumstances. except for the adoption of the following new and amended PFRS which became effective on January 1, 2009. Auditors’ Responsibility PAS 1, Presentation of Financial Our responsibility is to express an opinionStatements on these financial statements based on our audits. We The revised standard separates and non-owner changes in equity. conducted our audits in accordance withowner Philippine Standards on Auditing. ThoseThe standards require statement of changes in equity includes only details of transactions with owners, with that we comply with ethical requirements and plan and perform the audit to obtain reasonable non-owner changes in equity presented in a reconciliation of each component of equity. assurance whether the financial statements are free from material misstatement. In addition, the standard introduces the statement of comprehensive income: it items of recognized and expense, either in one statement, or An auditpresents involvesall performing proceduresincome to obtain audit evidence about the single amounts and disclosures in two linked statements. in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to Company hasthose elected present two linked statements. fraud orThe error. In making risktoassessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit  PFRS 7 Amendments – Improving Disclosuresbut about Instruments procedures that are appropriate in the circumstances, not Financial for the purpose of expressing an amendments to PFRS 7, Financial Instruments: opinion The on the effectiveness of the entity’s internal control. Disclosures, require additional about fair value and of liquidity risk. Fair valueused measurements An auditdisclosures also includes evaluating themeasurement appropriateness accounting policies and the related toofitems recorded at fair value be disclosedas bywell source of inputs using a reasonableness accounting estimates madeare byto management, as evaluating the overall three of level value statements. hierarchy, by class, for all financial instruments recognized at fair presentation the fair financial value. In addition, a reconciliation between the beginning and ending balance for level 3 fairthat value required, asiswell as significant transfers to between We believe the measurements audit evidence is wenow have obtained sufficient and appropriate provide a basis levelsopinion. in the fair value hierarchy. for our audit

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S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation 0012-FR-1 The amendments also clarify the requirements for liquidity risk disclosures withNo.respect to derivative transactions and financial assets used for liquidity management. The fair value measurement INDEPENDENT AUDITORS’ disclosures REPORT and the liquidity risk disclosures are not significantly impacted by the amendments and are presented in Note 20.

The Company has also adopted the following new and revised PFRS and Philippine Interpretations of the International Financial Reporting Interpretations Committee (IFRIC), The Stockholders and Board of Directors which became effective beginning January 1, 2009. Adoption of these changes in PFRS PetroEnergy Resources Corporation did not have any significant effect to the Company: 7th Floor, JMT Building

ADB Avenue, Ortigas Center, Pasig City  PAS 23, Borrowing Costs (Revised)  PFRS 8, Operating Segments  Philippine IFRIC 13, Customer Loyalty Programmes We have audited theInterpretation accompanying financial statements of PetroEnergy Resources Corporation,  Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation which comprise the statements of financial position as at December 31, 2009 and 2008, and the  PAS 32 and PAS 1 Amendments, Puttable Financial Instruments and Obligations statements of income, statements of comprehensive income, statements of changes in equity and Arising on flows Liquidation statements of cash for each of the three years in the period ended December 31, 2009, and a  PFRS 1 and PAS 27 Amendments, of explanatory an Investment in a Subsidiary, Jointly summary of significant accounting policies andCost other notes. Controlled Entity or Associate Management’s the Financial  PFRS 2Responsibility Amendment, for Vesting ConditionsStatements and Cancellations  Philippine Interpretation IFRIC 9 and PAS 39 Amendments, Embedded Derivatives Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility designing, New Accounting Standards, Interpretations, and Amendments to Existingincludes: Standards that implementing and maintaining relevant to the preparation and fair presentation of have been issued but areinternal not yet control effective financial thatadopt are free material misstatement, whether dueenumerated to fraud or error; Thestatements Company will thefrom following standards and interpretations below selecting and applying appropriate and making accounting estimates when these become effective.accounting Except as policies; otherwise indicated, the Company does notthat are reasonable theadoption circumstances. expectinthe of these new and amended PFRS and Philippine Interpretations to have significant impact on its financial statements. Auditors’ Responsibility Effective in 2010 Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Those standards  PFRS 3, Business Combinations (Revised)Standards and PAS on 27,Auditing. Consolidated and Separaterequire that we comply withStatements ethical requirements Financial (Amended)and plan and perform the audit to obtain reasonable assurance whether thestandards financial are statements fromperiods material misstatement. The revised effectiveare for free annual beginning on or after July 1, 2009. PFRS 3 (Revised) introduces significant changes in the accounting for business An audit involves performing procedures obtainChanges audit evidence about the amounts and disclosures combinations occurring after thistodate. affect the valuation of non-controlling in the financial statements. The procedures selected on recognition the auditor’s judgment, including interest, the accounting for transaction costs,depend the initial and subsequent the assessment of the risks of material misstatement of the financial statements, whether measurement of a contingent consideration and business combinations achieveddue in to fraud or error. In making those risk assessments, the auditors consider internal control relevant stages. These changes will impact the amount of goodwill recognized, the reported to the entity’s preparation and fair presentation of the financial in order to design audit results in the period that an acquisition occurs and statements future reported results. PAS 27 procedures that are appropriate in the circumstances, but not for the purpose of expressing (Amended) requires that a change in the ownership interest of a subsidiary (withoutan opinion on theofeffectiveness of the entity’s control.with owners in their capacity as loss control) is accounted for asinternal a transaction An audit also includes evaluating the appropriateness of accounting used and the it give owners. Therefore, such transactions will no longer give risepolicies to goodwill, nor will reasonableness of accounting estimates made by management, as well as evaluating the overall rise to a gain or loss. Furthermore, the amended standard changes the accounting for presentation of the financial statements. losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by PFRS 3 (Revised) and PAS 27 (Amended) will affect future acquisitions or We believe that auditofevidence we have obtained is sufficient and appropriate to provide loss of the control subsidiaries and transactions with non-controlling interests. PFRS a3 basis for our audit opinion. (Revised) will be applied prospectively while PAS 27 (Amended) will be applied retrospectively with a few exceptions.

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Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets to Owners BOA/PRC 0001with This Interpretation is effective for annual periods beginning on or after JulyReg. 1, No. 2009 SECto Accreditation No. 0012-FR-1  Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets Owners early application permitted. It provides guidance on how to account for non-cash This Interpretation is effective for annual periods beginning or after aJuly 1, 2009 distributions to owners. The interpretation clarifies when to on recognize liability, howwith to early application permitted. It provides guidance on how to account for non-cash INDEPENDENT REPORTassets, and when to derecognize the asset and liability. measure AUDITORS’ it and the associated distributions to does owners. The interpretation clarifies liability, how to The Company not expect the Interpretation towhen have to anrecognize impact onathe financial measure it and the associated assets, and when to derecognize the asset and liability. statements as the Company has not made non-cash distributions to shareholders in The Company does not expect the Interpretation to have an impact on the financial the past. statementsand as the has not made non-cash distributions to shareholders in The Stockholders the Company Board of Directors the past. PetroEnergy Resources Corporation  Philippine Interpretation IFRIC 18, Transfers of Assets from Customers 7th Floor, JMT Building is to be applied prospectively to transfers of assets from customers This Interpretation of Assets from Philippine Interpretation IFRIC 18, The Transfers from Customers ADB Avenue, Ortigas Pasig City received on orCenter, after July 1, 2009. Interpretation provides guidance on how to This Interpretation is to be applied to transfers prospectively of assets from customers account for items of property, plant and equipment received from customers or cash received on or after July 1, 2009. The Interpretation provides guidance how tothe that is received and used to acquire or construct assets that are used toon connect account of property, plant and equipment fromofResources customers or cash or We have auditedfor the financial statements ofreceived PetroEnergy Corporation, customer toitems aaccompanying network or to provide ongoing access to a supply goods or services that is received and used to acquire or construct assets that are used to connect the the that is received and used to acquire or construct assets that are used to connect the which comprise both. the statements of financial position as at December 31, 2009 and 2008, and customer to a network or to provide ongoing access to a supply of goods or services customer to a network or toofprovide ongoing access a supply ofofgoods or services orand statements of income, statements comprehensive income,tostatements changes in equityor both. both. the transferred item the definition of anended asset, the asset is31, measured statements ofWhen cash flows for each the meets three years in the period December 2009, When the transferred item of meets the definition of an asset, the asset is measured at and a summary significant accounting policies and explanatory notes. The at of fair value initial recognition part of an exchange transaction. The service(s) fair value onon initial recognition as as part ofother an exchange transaction. service(s) When the are transferred the definitionreceived of an asset, is measured delivered identifieditem andmeets the consideration (the the fair asset value of the asset) at fair valueResponsibility oneach initialidentifiable recognition asFinancial part of anStatements exchange transaction. Theservice service(s) Management’s for the service. is allocated to Revenue is recognized as each delivered are identified and the consideration received (the fair value of the asset) delivered by the entity. allocated to each identifiable service. Revenue is recognizedofasthese eachfinancial service is Management is responsible for the preparation and fair presentation statements in delivered by the entity. accordance Philippine Financial Standards. This responsibility includes: designing,  PASwith 39 Amendment – EligibleReporting Hedged Items implementing and maintaining internal control Instruments: relevant to the preparationand andMeasurement, fair presentation of The amendment to PAS 39, Financial Recognition  PAS 39 Amendment – Eligible Hedged Items financial statements that are free from material misstatement, whether due to fraud or error; effective for annual periods beginning on or after July 1, 2009, clarifies that an entity is The amendment to PAS 39, Financial Instruments: Recognition and Measurement, selecting and applying appropriate accounting policies; and making accounting estimates permitted to designate a portion of the fair value changes or cash flow variability ofthat a are effective for annual periods beginning on or after July 1, 2009, clarifies that an entity is reasonable in the circumstances. financial instrument as a hedged item. This also covers the designation of inflation as permitted to designate a portion of the fair value changes or cash flow variability of a a hedged risk or portion in particular situations. The Company has concluded that the financial instrument asno a impact hedgedon item. This alsoposition covers the designation of as Auditors’ Responsibility amendment will have the financial or performance of inflation the a hedged risk or portion in particular situations. The Company has concluded that the Company, as the Company has not entered into any such hedges. amendment willexpress have noan impact onon thethese financial position or performance of our the audits. We Our responsibility is to opinion financial statements based on Company, as the Company has not entered into any such hedges. conducted our 2audits in accordance with Philippine Standards on Auditing. Those standards require  PFRS Amendments – Group Cash-settled Share-based Payment Transactions that we The comply with ethical requirements and plan and perform the audit to obtain amendments to PFRS 2, Share-based Payments, effective for annual reasonable periods  PFRS 2 Amendments – Group Payment Transactions assurance whether statements areclarify free Share-based from material misstatement. beginning onthe or financial after January 1,Cash-settled 2010, the scope and the accounting for The amendments to PFRS 2, Share-based effective for annual has periods company cash-settled share-based paymentPayments, transactions. The Company on orthe after January 1,will 2010, clarify theevidence scope and the accounting An auditbeginning involves performing procedures to have obtain about theposition amountsfor concluded that amendment noaudit impact on the financial orand disclosures company cash-settled share-based payment transactions. The Company has in the financial statements. The procedures selected depend on the auditor’s judgment, including performance of the Company as the Company has not entered into any such shareconcluded that the amendment will have no impact on the financial position or the assessment of the risks of material misstatement of the financial statements, whether due to based payment transactions. of the Company as the Company has not consider entered into any such sharefraud orperformance error. In making those risk assessments, the auditors internal control relevant to based payment transactions. the entity’s preparation and fair presentation of the financial statements in order to design audit Improvements to PFRSs procedures that are appropriate the circumstances, butwere not for the purpose expressing The omnibus amendments toinPFRSs issued in 2009 issued primarilyofwith a view toan Improvements to PFRSs opinion on the effectiveness of the entity’s internal control. removing inconsistencies and clarifying wording. The amendments are effective for annual The omnibus amendments to the PFRSs issued in 2009 werestated. issuedpolicies primarily withand ahas view to An audit alsofinancial includes evaluating of accounting used thenot periods years January 1,appropriateness 2010 except otherwise The Company removing inconsistencies and clarifying wording. The amendments are effective for annual reasonableness of accounting estimates made by management, as well as evaluating the overall yet adopted the following amendments and anticipates that these changes will have no periods years January 1, 2010 except otherwise stated. The Company has not presentation of theon financial statements. materialfinancial effect the financial statements. yet adopted the following amendments and anticipates that these changes will have no effect the evidence financial statements. We material believe that theon audit we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 

*SGVMC113435*, *SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

Accreditation PFRS 2, Share-based Payment: clarifies that the contribution of SEC a business onNo. 0012-FR-1 formation of a joint venture and combinations under common control are not within the scope ofAUDITORS’ PFRS 2 even though they are out of scope of PFRS 3, Business INDEPENDENT REPORT Combinations (Revised). The amendment is effective for financial years on or after July 1, 2009.

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 PFRS 5, and Non-current Assets Held for Sale and Discontinued Operations: clarifies that The Stockholders the Board of Directors the disclosures required in respect of non-current assets and disposal groups classified PetroEnergy Resources Corporation as held for sale or discontinued operations are only those set out in PFRS 5. The 7th Floor, JMT Building disclosure requirements of other PFRSs only apply if specifically required for such nonADB Avenue, Ortigas Center, Pasig City current assets or discontinued operations.  PFRS Operating Segment Information: clarifies segment Resources assets and Corporation, liabilities We have audited8,the accompanying financial statements of that PetroEnergy need only be reported when those assets and liabilities are included in measures that which comprise the statements of financial position as at December 31, 2009 and 2008, and the are used by the chief operating decision maker. statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a  PAS 1, Presentation of Financial clarifies that the terms of a liability that summary of significant accounting policies Statements: and other explanatory notes. could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty affect itsStatements classification. Management’s Responsibility for do thenot Financial  PASis7,responsible Statement of Flows: explicitly states that only expenditure that results in a in Management forCash the preparation and fair presentation of these financial statements recognized asset can be classified as a cash flow from activities. accordance with Philippine Financial Reporting Standards. This investing responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of  statements PAS 17, Leases: removes thematerial specificmisstatement, guidance on classifying land a lease. Prior to financial that are free from whether due toas fraud or error; leases ofaccounting land were classified as operating leases. The amendment selecting the andamendment, applying appropriate policies; and making accounting estimates that are now that leases of land are classified as either ‘finance’ or ‘operating’ in reasonable in requires the circumstances. accordance with the general principles of PAS 17. Auditors’ Responsibility  PAS 18, Revenue: The amendment adds guidance (which accompanies the standard) Our responsibility is to whether express an an entity opinion these statements based on our audits.toWe to determine is on acting asfinancial a principal or as an agent. The features conducted our audits accordance with Philippine Standards on Auditing. Those standards require consider areinwhether the entity: that we comply with ethicalresponsibility requirementsforand plan and theservice audit to obtain reasonable o Has primary providing theperform goods or assurance the financial o whether Has inventory risk statements are free from material misstatement. o Has discretion in establishing prices An audit involves performing to obtain audit evidence about the amounts and disclosures o Bears the credit procedures risk in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment ofImpairment the risks of of material financial due to  PAS 36, Assets:misstatement clarifies that of thethe largest unit statements, permitted forwhether allocating fraud or error. In making those assessments, the auditors consider segment internal control relevant goodwill, acquired in arisk business combination, is the operating as defined in to the entity’s preparation fair presentation of thepurposes. financial statements in order to design audit PFRS 8 beforeand aggregation for reporting procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion the 38, effectiveness the entity’s internal  on PAS Intangible of Assets: clarifies that if control. an intangible asset acquired in a business An audit also includes evaluating the appropriateness of accounting policies used and combination is identifiable only with another intangible asset, the acquirer maythe reasonableness of accounting estimates made by management, as well as evaluating the overall recognize the group of intangible assets as a single asset provided the individual presentation of the financial statements. assets have similar useful lives. Also clarifies that the valuation techniques presented for determining the fair value of intangible assets acquired in a business combination We believe that evidence wemarkets have obtained sufficient and and are appropriate to provide a basis that arethe notaudit traded in active are onlyisexamples not restrictive on the for our audit opinion. methods that can be used.

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S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 PAS 39, Financial Instruments: Recognition and Measurement: clarifies the following: o that a prepayment option is considered closely related to the host contract when the exercise price REPORT of a prepayment option reimburses the lender up to the INDEPENDENT AUDITORS’ approximate present value of lost interest for the remaining term of the host contract. o that the scope exemption for contracts between an acquirer and a vendor in a business buy or sell an acquiree at a future date applies only to The Stockholders andcombination the Board oftoDirectors binding forward contracts, PetroEnergy Resources Corporation and not derivative contracts where further actions by either party are still to be taken. 7th Floor, JMT Building o that gains lossesPasig on cash ADB Avenue, Ortigas or Center, Cityflow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cashfinancial flows affect profit and We have audited the accompanying statements of loss. PetroEnergy Resources Corporation,

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which comprise the statements of financial position as at December 31, 2009 and 2008, and the  Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives: statements of income, statements of comprehensive income, statements of changesclarifies in equity and that it does not apply to possible reassessment at the date of acquisition, to 31, embedded statements of cash flows for each of the three years in the period ended December 2009, and a derivatives in contracts acquired in and a business combination between entities or summary of significant accounting policies other explanatory notes. businesses under common control or the formation of joint venture. Management’s Responsibility for the Financial Statements  Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation: statesisthat, in a hedge a net investment a foreign operation, qualifying hedging Management responsible forofthe preparation andinfair presentation of these financial statements in instruments may be held by any entity or entities within the group, including the foreign accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, operation as longinternal as the designation, documentation and effectiveness implementing anditself, maintaining control relevant to the preparation and fair presentation of of PAS 39 that to a misstatement, net investmentwhether hedge are financialrequirements statements that are free fromrelate material duesatisfied. to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are Effectiveininthe 2012 reasonable circumstances. Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate Auditors’ Responsibility This Interpretation, effective for annual periods beginning on or after January 1, 2012, accounting revenue and associated by entities that undertake the Our covers responsibility is to for express an opinion on theseexpenses financial statements based on our audits. We construction of real estate directly or through subcontractors. The Interpretation requires conducted our audits in accordance with Philippine Standards on Auditing. Those standards require revenuewith on construction of real estate be recognized only except that that we comply ethical requirements and plan and perform theupon auditcompletion, to obtain reasonable when such contract qualifies as construction contract to be accounted for under PAS 11, assurance whether the financial statements are free from material misstatement. Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involvingabout provision of services An audit involves performing procedures to obtain audit evidence the amounts andwith disclosures the construction materials and where the risks and reward of ownership are transferred to in the financial statements. The procedures selected depend on the auditor’s judgment, including the buyer on a continuous basis will also be accounted for based on stage of completion. the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to Accounting Policiesand fair presentation of the financial statements in order to design audit the entity’s preparation procedures that are appropriate in the circumstances, but not for the purpose of expressing an Revenue opinion on theRecognition effectiveness of the entity’s internal control. Revenue recognized to the the extent that it is probable that the economic benefits An audit also is includes evaluating appropriateness of accounting policies used andwill theflow to the Company and the revenue canmade be reliably measured. Revenue measuredthe at the reasonableness of accounting estimates by management, as well asisevaluating overall fair valueof ofthe thefinancial consideration received, excluding discounts, rebates and other sales taxes presentation statements. or duty. The following specific recognition criteria must also be met before revenue is We recognized: believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Oil Revenues Revenues from producing oil wells are recognized as income at the time of production.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Interest Income Interest income is recognized as the interest accrues taking into account the effective yield on the asset. INDEPENDENT AUDITORS’ REPORT

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that readilyof convertible The Stockholders and are the Board Directors to known amounts of cash with original maturities of three months or less from the PetroEnergy Resources Corporation dates of acquisition and that are subject to an insignificant risk of change in value. 7th Floor, JMT Building

ADB Avenue, Ortigas Center, Pasig City Financial Assets Financial assets within the scope of PAS 39, Financial Instruments: Recognition and Measurement, classified asfinancial FVPL, loans and receivables, held-to-maturity We have audited theare accompanying statements of PetroEnergy Resources(HTM) Corporation, investments, available-for-sale (AFS) investments or as derivatives designated as hedging which comprise the statements of financial position as at December 31, 2009 and 2008, and the instruments in an effective hedge, as appropriate. The classification depends on statements of income, statements of comprehensive income, statements of changes inthe equity and purpose for which Management determines statements of cash flowsthe forinvestments each of the were three acquired. years in the period ended Decemberthe 31, 2009, and a classification of its investments at initial recognition and re-evaluates summary of significant accounting policies and other explanatory notes. this designation at every reporting date. Management’s Responsibility for the Financial Statements Financial assets are recognized initially at fair value plus transaction costs directly attributable to their acquisition in the case and of allfair financial assets of not carried at FVPL. Management is responsible for the preparation presentation these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, All regular way purchasesinternal and sales of financial recognized trade date, of implementing and maintaining control relevantassets to the are preparation andon fairthe presentation which is the date that the Company commits to purchase the asset. Regular way financial statements that are free from material misstatement, whether due to fraud or error; purchases or sales are purchases or sales of financial assets that require delivery of that assets selecting and applying appropriate accounting policies; and making accounting estimates are within the period generally established by regulation or convention in the marketplace. reasonable in the circumstances. Assets under this category are classified as current assets if maturity is within 12 months Auditors’ Responsibility from the statement of financial position date and as noncurrent assets if maturity date is more than a is year from thean statement of financial position date. Our responsibility to express opinion on these financial statements based on our audits. We

conducted our audits in accordance with Philippine Standards on Auditing. Those standards require a. comply Financial FVPL. This and includes assets and financial that we withAssets ethicalatrequirements plan financial and perform theheld auditfor totrading obtain reasonable assets designated upon initial recognition as at FVPL. Financial assets are classified assurance whether the financial statements are free from material misstatement. as held for trading if they are acquired for the purpose of selling in the near term. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Financial assets atThe FVPL are recorded in thedepend statement of financial at fair value in the financial statements. procedures selected on the auditor’sposition judgment, including with unrealized mark-to-market gains and losses reported as part of the current year the assessment of the risks of material misstatement of the financial statements, whether due to operations underthose “Net risk gainassessments, (loss) on fair value changes on financial assets at fair value to fraud or error. In making the auditors consider internal control relevant through profit and loss”. Interest earned or incurred is recorded in interest income or the entity’s preparation and fair presentation of the financial statements in order to design audit expense, respectively, while dividend income is recorded in ‘miscellaneous income’ procedures that are appropriate in the circumstances, but not for the purpose of expressing an according to the terms of the contract, or when the right of payment has been opinion on the effectiveness of the entity’s internal control. established. Derivatives, including separated embedded are and also the classified An audit also includes evaluating the appropriateness of accountingderivatives policies used as FVPL unless they are designated as effective hedging instruments or a financial reasonableness of accounting estimates made by management, as well as evaluating the overall guarantee contract.statements. presentation of the financial Classified financial assets at FVPL are the marketable debt equity We believe that the as audit evidence we have obtained is Company’s sufficient and appropriate to and provide a basis securities held for trading purposes and investment in golf club shares as described in for our audit opinion. Note 5.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 b. Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, and receivables are carried at amortized cost using the INDEPENDENT AUDITORS’loans REPORT effective interest method less any allowance for impairment. Gains and losses are recognized in the statement of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

The Stockholders and the Board of Directors Classified under Corporation this category are the Company’s cash on hand and in banks, PetroEnergy Resources restricted cash, short-term investments and receivables. 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City c. HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Company’s management has the positivefinancial intentionstatements and abilityof toPetroEnergy hold to maturity. After initial We have audited the accompanying Resources Corporation, measurement, HTM investments are measured at amortized cost using the2008, effective which comprise the statements of financial position as at December 31, 2009 and and the interest method. Gains and are recognized in the statement incomeinwhen the statements of income, statements oflosses comprehensive income, statements of of changes equity and investments are derecognized orthree impaired, as through theDecember amortization statements of cash flows for each of the yearsas inwell the period ended 31, 2009, and a process. summary of significant accounting policies and other explanatory notes. The Company has no HTM asStatements at December 31, 2009 and 2008. Management’s Responsibility for investments the Financial d. AFS Investments. investments areand those assets that are Management is responsibleAFS for the preparation fairnon-derivative presentation offinancial these financial statements in designated as AFS or are not classified in any of the three preceding categories. After accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, initial measurement, AFS investments are measured fair value and with fair unrealized gainsof implementing and maintaining internal control relevant to the at preparation presentation or losses recognized directly in equity until the investment is derecognized or financial statements that are free from material misstatement, whether due to fraud or error; determined to be impaired at which time the cumulative gainaccounting or loss previously selecting and applying appropriate accounting policies; and making estimates that are recorded in equity is recognized in the statement of income. reasonable in the circumstances. The Company has no AFS investments as at December 31, 2009 and 2008. Auditors’ Responsibility Derivative is Financial Instruments. are recorded at fairbased value on andour carried as We Our e. responsibility to express an opinionDerivatives on these financial statements audits. assets when their fair value is positive and as liabilities when their fair value is conducted our audits in accordance with Philippine Standards on Auditing. Those standards require Changes in the fair value ofplan derivatives are included in to theobtain statement of that we negative. comply with ethical requirements and and perform the audit reasonable income. assurance whether the financial statements are free from material misstatement. embedded in other financial instruments are treated An auditDerivatives involves performing procedures to obtain audit evidence about as theseparate amountsderivatives and disclosures and recorded at fair value if their economic characteristics and risks are not closely in the financial statements. The procedures selected depend on the auditor’s judgment, including related toofthose of the contract, and the host contract is statements, not itself heldwhether for trading the assessment the risks of host material misstatement of the financial due to designated at fair value profit and fraud oror error. In making those riskthrough assessments, theloss. auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit Thethat Company assessesin whether embedded derivatives separated procedures are appropriate the circumstances, but not forare the required purpose to of be expressing an from host contracts when the Company first becomes party to the contract. An opinion on the effectiveness of the entity’s internal control. derivative is separated from the host andpolicies accounted as the a An auditembedded also includes evaluating the appropriateness of contract accounting usedfor and derivative if all of the following conditions are met: a) the economic characteristics and reasonableness of accounting estimates made by management, as well as evaluating the overall risks of the embedded derivative are not closely related to the economic characteristics presentation of the financial statements. and risks of the host contract; b) a separate instrument with the same terms as the embedded wouldwe meet theobtained definition a derivative; and c) the hybrid or a basis We believe that thederivative audit evidence have is of sufficient and appropriate to provide combined instrument is not recognized at FVPL. Reassessment only occurs if there is for our audit opinion. a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation 0012-FR-1 Subsequent reassessment is prohibited unless there is change in the terms ofNo. the contract that significantly modifies the cash flows that otherwise would be required under the contract, inREPORT which case reassessment is required. The Company determines INDEPENDENT AUDITORS’ whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expectedand cash on the contract. The Stockholders theflow Board of Directors

PetroEnergy Resources Corporation 7th Floor,The JMTCompany Building has no derivative financial instruments as at December 31, 2009 and 2008. ADB Avenue, Ortigas Center, Pasig City

Determination of Fair Value The audited fair value investments that are actively tradedofinPetroEnergy organized financial markets is We have theofaccompanying financial statements Resources Corporation, determined by reference to quoted market bid prices at the close of business on the which comprise the statements of financial position as at December 31, 2009 and 2008, and the statement of financial positionofdate. For investments where there isof nochanges active market, fairand statements of income, statements comprehensive income, statements in equity value is using valuation techniques, inputsended and assumptions from market statements of determined cash flows for each of the three years inusing the period December 31, 2009, and a observable data and condition, and reflect appropriate adjustments that market participants summary of significant accounting policies and other explanatory notes. would make for credit and liquidity risks existing as at each of the periods indicated. Such techniquesResponsibility include using recent arm’s length Statements market transactions; reference to the current Management’s for the Financial market value of another instrument which is substantially the same; discounted cash flow analysis is orresponsible other valuation models. Management for the preparation and fair presentation of these financial statements in

accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Day 1 Profit implementing and maintaining internal control relevant to the preparation and fair presentation of Where the transaction in a non-active market is different to the value or from other financial statements that areprice free from material misstatement, whether duefair to fraud error; observable current market transactions in the same instrument or based on a valuation selecting and applying appropriate accounting policies; and making accounting estimates that are technique whose variables include only data from observable market, the Company reasonable in the circumstances. recognizes the difference between the transaction price and fair value (a Day 1 profit) in the statement of income, unless it qualifies for recognition as some other type of asset. In Auditors’ Responsibility cases where use is made of data which is not observable, the difference between the transaction price model is only recognized in statements the statement of income Our responsibility is to and express anvalue opinion on these financial based on our when audits.theWe inputs become observable or when the instrument is derecognized. For each transaction, conducted our audits in accordance with Philippine Standards on Auditing. Those standards require thecomply Company the appropriate method of recognizing thetoDay 1 profit amount. that we withdetermines ethical requirements and plan and perform the audit obtain reasonable

assurance whether the financial statements are free from material misstatement. Financial Liabilities Financial liabilities withinprocedures the scope to of obtain PAS 39, Financial Instruments: An audit involves performing audit evidence about the Recognition amounts andand disclosures Measurement, are classified as financial liabilities at FVPL and other financial liabilities, as in the financial statements. The procedures selected depend on the auditor’s judgment, including appropriate. the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to a. Financial Liabilities at FVPL - Financial liabilities at statements FVPL include financial liabilities the entity’s preparation and fair presentation of the financial in order to design audit held for trading and financial liabilities designated upon initial recognition as at fair an procedures that are appropriate in the circumstances, but not for the purpose of expressing value through profitof and Derivatives, including separated embedded derivatives, opinion on the effectiveness theloss. entity’s internal control. are also classified as FVPL, unless they are as policies effectiveused hedging An audit also includes evaluating the appropriateness designated of accounting and the instruments. reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling the near term.we Gains losses on liabilities held for trading are recognized We believe that theinaudit evidence haveorobtained is sufficient and appropriate to provide a basis in the statement of income. for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

Accreditation No.2009 0012-FR-1 The Company has no designated financial liabilities at FVPL as atSEC December 31, and 2008.

INDEPENDENT AUDITORS’ REPORT b. Other Financial Liabilities - Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments that are not quoted in an active market. These liabilities are carried at cost or amortized cost in the statement of financial position. Amortization is determined The Stockholders and the Board of Directors using the effective interest method. PetroEnergy Resources Corporation Gains losses are recognized in the statement of income, when the liabilities are 7th Floor, JMTand Building derecognized well as through ADB Avenue, Ortigas as Center, Pasig City the amortization process.

Classified under this category are accounts payable, accrued expenses and asset retirement obligation. We have audited the accompanying financial statements of PetroEnergy Resources Corporation,

which comprise the statements of financial position as at December 31, 2009 and 2008, and the Designated Financial Assets orofFinancial Liabilities at FVPL statements of income, statements comprehensive income, statements of changes in equity and Financial or financial liabilities classified are designated statements ofassets cash flows for each of the three yearsininthis thecategory period ended Decemberby 31,the 2009, and a management on initial recognition when the following criteria are met: summary of significant accounting policies and other explanatory notes.  The designation eliminates significantly the inconsistent treatment that Management’s Responsibility foror the Financial reduces Statements would otherwise arise from measuring the assets or liabilities or recognizing gains or lossesison them on a for different basis; Management responsible the preparation and fair presentation of these financial statements in  The assets and liabilities are part of a group of financial financial liabilities or accordance with Philippine Financial Reporting Standards. Thisassets, responsibility includes: designing, both which are managed and their performance evaluated on a fair value basis, in implementing and maintaining internal control relevant to the preparation and fair presentation of documented risk management or investment strategy; or or error; financialaccordance statements with that aare free from material misstatement, whether due to fraud  The financial instrument contains an embedded derivative, unless the embedded selecting and applying appropriate accounting policies; and making accounting estimates that are derivative does not significantly modify the cash flows or it is clear, with little or no reasonable in the circumstances. analysis, that it would not be separately recorded. Auditors’ Responsibility Designated financial assets and financial liabilities at FVPL are recorded in the statement financial position at fair value. Changes in fairfinancial value are recorded based in “net on gain on We Our of responsibility is to express an opinion on these statements our(loss) audits. fair value changes on financial assets at FVPL” in the statement of income. Interest conducted our audits in accordance with Philippine Standards on Auditing. Those standards require or incurred is recorded in interest orperform expense, that earned we comply with ethical requirements and income plan and therespectively. audit to obtain reasonable assurance whether the financial statements are free from material misstatement. The Company has no designated financial assets or financial liabilities at FVPL. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Offsetting Financial Instruments in the financialofstatements. The procedures selected depend on the auditor’s judgment, including Financial assets and financial liabilities are offset of and the net amount reportedwhether in the due to the assessment of the risks of material misstatement the financial statements, statement of financial position if, and only if, there is a currently enforceable legal right to fraud or error. In making those risk assessments, the auditors consider internal control relevant to offset the recognized amounts and there is no intention to settle on a net basis, or to the entity’s preparation and fair presentation of the financial statements in order to design audit realize the and settle the liability simultaneously. procedures thatasset are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Impairment of Financial Assets An audit also includes evaluating the appropriateness of accounting policies used and the The Company atestimates each statement of financial position whether a financial reasonableness of assesses accounting made by management, as date well as evaluating the overall asset or aofgroup of financial assets is impaired. presentation the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Loans and Receivables The Company first assesses whether objective evidence of impairment exists individually for financialAUDITORS’ assets that are individually significant, or collectively for financial assets that INDEPENDENT REPORT are not individually significant. If the Company determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation The Stockholders and the Board of Directors of future cash flows for groups of such assets by being indicative of the debtors’ ability to PetroEnergy Resources Corporation pay all amounts due according to the contractual terms of the assets being evaluated. 7th Floor, JMT Building Assets that are individually assessed for impairment and for which an impairment loss is, or ADB Avenue, Ortigas Center, Pasig City continues to be, recognized are not included in a collective assessment for impairment.

If there is objective evidence that an impairment lossofon assets carried at amortized cost We have audited the accompanying financial statements PetroEnergy Resources Corporation, has been incurred, the amount of the loss is measured as the difference between the which comprise the statements of financial position as at December 31, 2009 and 2008, and the asset’sofcarrying and the present value of estimated future cash flows (excluding statements income,amount statements of comprehensive income, statements of changes in equity and future of expected credit that been at the financial statements cash flows forlosses each of thehave threenot years inincurred) the perioddiscounted ended December 31, 2009, and a asset’s original effective interest rate (i.e., the effective interest rate computed at initial summary of significant accounting policies and other explanatory notes. recognition). The carrying amount of the asset is reduced through use of an allowance account. The amount of the loss be recognized in the statement of income. Management’s Responsibility for theshall Financial Statements If in a subsequent period, of the impairment loss decreases the decrease Management is responsible for the the amount preparation and fair presentation of these and financial statements in can be related objectively to an event occurring after the impairment was recognized, the accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, previously recognized impairment loss is reversed, to the extent that the carrying value implementing and maintaining internal control relevant to the preparation and fair presentationofof the statements asset does that not exceed amortized at the reversal date.due Anytosubsequent financial are freeits from materialcost misstatement, whether fraud or error; reversal of an impairment loss is recognized in the statement of income. selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In relation to receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the Auditors’ Responsibility debtor) that the Company will not be able to collect all of the amounts due under the original termsisof invoice. The carrying amount of thestatements receivablebased is reduced through Our responsibility tothe express an opinion on these financial on our audits.the We use of an allowance account. Impaired receivables are derecognized when they are conducted our audits in accordance with Philippine Standards on Auditing. Those standards require assessed that we comply as withuncollectible. ethical requirements and plan and perform the audit to obtain reasonable

assurance whether the financial statements are free from material misstatement. Derecognition of Financial Assets and Financial Liabilities Financial Assets An audit involves performing procedures to obtain audit evidence about the amounts and disclosures A financial asset or, where applicable, aselected part of adepend financial or a partjudgment, of a groupincluding of in the financial statements. The procedures onasset the auditor’s similar financial assets, is derecognized when: the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to  thepreparation rights to receive cash flows fromofthe havestatements expired; in order to design audit the entity’s and fair presentation theasset financial  the Company retains the right to receive cash flows from thepurpose asset, but has assumed procedures that are appropriate in the circumstances, but not for the of expressing an an obligation to pay them in full without material delay to a third party under a ‘passopinion on the effectiveness of the entity’s internal control. through’ arrangement; An audit also includes evaluatingorthe appropriateness of accounting policies used and the  the Company has transferred rightsby to management, receive cash flows from asset and reasonableness of accounting estimatesitsmade as well as the evaluating theeither overall (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither presentation of the financial statements. transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SECan Accreditation No. has 0012-FR-1 When the Company has transferred its rights to receive cash flows from asset and neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s INDEPENDENT AUDITORS’ REPORT continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be to repay. Therequired Stockholders and the Board of Directors

PetroEnergy Resources Corporation Financial 7th Floor, JMTLiabilities Building A financial liability Center, is derecognized when the obligation under the liability is discharged or ADB Avenue, Ortigas Pasig City cancelled or has expired.

an existing financial liabilityfinancial is replaced by another from the same lender on We When have audited the accompanying statements of PetroEnergy Resources Corporation, substantially different terms, or the terms of an existing liability are substantially modified, which comprise the statements of financial position as at December 31, 2009 and 2008, and the such anofexchange or modification is treated as a income, derecognition of the of original liability and and statements income, statements of comprehensive statements changes in equity the recognition a new the difference in the respective carrying amounts is and a statements of cash of flows for liability, each of and the three years in the period ended December 31, 2009, recognized in the statement of income. summary of significant accounting policies and other explanatory notes. Crude Oil Inventory Management’s Responsibility for the Financial Statements Crude oil inventory is at fair market value. Management is responsible for the preparation and fair presentation of these financial statements in Prepaid with expenses and other current assets Standards. This responsibility includes: designing, accordance Philippine Financial Reporting Prepaid expenses and other current assets pertain to to the resources controlled by presentation the Companyof implementing and maintaining internal control relevant preparation and fair as a result of past events and from which future economic benefits are expected flow to financial statements that are free from material misstatement, whether due to fraud ortoerror; the Company. selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Property and Equipment Property and equipment are stated at cost less accumulated depletion, depreciation and Auditors’ Responsibility amortization and any accumulated impairment losses. The initial cost of the property and consists of its purchase price, any import duties,based taxes on andour any Our equipment responsibility is to express an opinion on including these financial statements audits. We directly attributable costs of bringing the assets to its working condition and location for itsrequire conducted our audits in accordance with Philippine Standards on Auditing. Those standards intended use and abandonment costs. Expenditures incurred after the fixed assets have that we comply with ethical requirements and plan and perform the audit to obtain reasonable been put into operation, suchstatements as repairs are andfree maintenance, are misstatement. normally charged to income assurance whether the financial from material in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures resulted an increase in the economic An audit involves performing procedureshave to obtain auditinevidence about the future amounts and disclosures benefits expected to be obtained from the use of an item of property and equipment in the financial statements. The procedures selected depend on the auditor’s judgment, including beyond its originally assessed standard of performance, the expenditures arewhether capitalized the assessment of the risks of material misstatement of the financial statements, due to as an additional cost of property and equipment. When the assets are retired or otherwise fraud or error. In making those risk assessments, the auditors consider internal control relevant to disposed of, the cost and the related accumulated depreciation are removed the audit the entity’s preparation and fair presentation of the financial statements in order tofrom design accounts and any resulting gain or loss is reflected in the income for the period. procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Wells, platforms and other facilities are depleted using the unit-of-production An audit also includes evaluating the appropriateness of accounting policies usedmethod and the computed based on estimates of proved reserves. The depletion base thethe overall reasonableness of accounting estimates made by management, as well as includes evaluating exploration and development cost of the producing oilfields. Other property and equipment presentation of the financial statements. are depreciated and amortized using the straight-line method over the estimated useful of the as evidence follows: we have obtained is sufficient and appropriate to provide a basis We lives believe thatassets the audit for our audit opinion. Office condominium units and improvements Transportation equipment Office furniture and other equipment

15 years 5 years 3 - 5 years

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

Accreditation No. 0012-FR-1 Wells in progress pertains to those development costs relating to theSEC Service Contract (SC) where oil in commercial quantities are discovered are subsequently reclassified to “Wells, platforms and other facilities” shown under “Property and equipment” account in the INDEPENDENT AUDITORS’ REPORT statement of financial position upon commercial production. Depletion of wells in progress commences upon transfer to property and equipment.

The useful life and depletion, The Stockholders and the Board ofdepreciation Directors and amortization method are reviewed periodically to ensure that the PetroEnergy Resources Corporationperiod and method of depletion, depreciation and amortization are consistent with the expected pattern of economic benefits from items of 7th Floor, JMT Building property and equipment. ADB Avenue, Ortigas Center, Pasig City Deferred Oil Exploration Costs The audited Company the full cost method of accounting for exploration costs determined We have thefollows accompanying financial statements of PetroEnergy Resources Corporation, on the basis of each SC area. Under this method, all exploration costs relating to each SC which comprise the statements of financial position as at December 31, 2009 and 2008, and the are tentatively deferred pending determination of whether the area contains oil reserves statements of income, statements of comprehensive income, statements of changes in equity in and commercial quantities. The exploration to the ended SC where oil in commercial statements of cash flows for each of the threecosts yearsrelating in the period December 31, 2009, and a quantities are discovered are policies subsequently reclassified to “Wells, summary of significant accounting and other explanatory notes.platforms and other facilities” shown under “Property and equipment” account in the statement of financial position upon substantial completion of the development Management’s Responsibility for the Financial Statementsstage. On the other hand, all costs relating to an abandoned SC are written off in the year the area is permanently abandoned. SCs are considered permanently abandoned if theofSCs have expired and/or in Management is responsible for the preparation and fair presentation these financial statements there are no definite plans for further exploration and/or development. accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of Investment Property financial statements that are free from material misstatement, whether due to fraud or error; Investment property includes land and improvements for capital appreciation or that rental selecting and applying appropriate accounting policies; andheld making accounting estimates are to others. Land is stated at cost less any impairment in value. reasonable in the circumstances.

The initial cost of the investment property comprises of purchase price and any directly Auditors’ Responsibility attributable costs of bringing the asset to its working condition. Expenditures incurred after the investment property has puton into operation, such as repairs and maintenance, Our responsibility is to express anbeen opinion these financial statements based on our audits.are We normally charged to income in the year when costs are incurred. In situations where it can conducted our audits in accordance with Philippine Standards on Auditing. Those standards require becomply clearly with demonstrated that the expenditures have resulted an increase the future that we ethical requirements and plan and perform theinaudit to obtaininreasonable economic benefits expected to be obtained from the use of an item of investment property assurance whether the financial statements are free from material misstatement. beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of procedures investment properties. An audit involves performing to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including Investmentof property is of derecognized when eitherofitthe hasfinancial been disposed of orwhether when thedue to the assessment the risks material misstatement statements, investment property is permanently withdrawn from use and no future economic is to fraud or error. In making those risk assessments, the auditors consider internal controlbenefit relevant expected from its disposal. Any gains or losses on the retirement or disposal of an the entity’s preparation and fair presentation of the financial statements in order to design audit investment property are recognized in the statement of income the year retirementanor procedures that are appropriate in the circumstances, but not for the in purpose of of expressing disposal. opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the Transfers are made to investment and only when, is a change use, reasonableness of accounting estimatesproperty made bywhen, management, as wellthere as evaluating theinoverall evidenced by the end of owner-occupation, commencement of an operating lease to presentation of the financial statements. another party or by the end of construction or development. Transfers are made from investment property when, and when, thereisissufficient a changeand in use, evidenced by We believe that the audit evidence weonly have obtained appropriate to provide a basis commencement of owner-occupation or commencement of development with a view to for our audit opinion. sell.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Impairment of Non-financial Assets The Company assesses at each reporting date whether there is an indication that an asset (e.g. crude oilAUDITORS’ inventory, property and equipment, investment properties) may be impaired. INDEPENDENT REPORT If any such indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in and is determined for an of individual asset, unless the asset does not generate cash Theuse Stockholders and the Board Directors inflows that are largely independent of those from other assets or groups of assets. Where PetroEnergy Resources Corporation the carrying amount of an asset exceeds its recoverable amount, the asset is considered 7th Floor, JMT Building impaired and is written down to its recoverable amount. In assessing value in use, the ADB Avenue, Ortigas Center, Pasig City estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks to thethe asset. In determining fair value less costs to sell, an appropriate We specific have audited accompanying financial statements of PetroEnergy Resourcesvaluation Corporation, model is used. These calculations are corroborated by valuation multiples, quoted which comprise the statements of financial position as at December 31, 2009 and 2008,share and the prices for companies or other available fairstatements value indicators. statements of publicly income,traded statements of comprehensive income, of changes in equity and

statements of cash flows for each of the three years in the period ended December 31, 2009, and a For assets excluding goodwill, policies an assessment is made at each reporting date as to summary of significant accounting and other explanatory notes. whether there is any indication that previously recognized impairment losses may no longer exist or may Responsibility have decreased.forIf the such indicationStatements exists, the Company makes an estimate of Management’s Financial recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine asset’s recoverable amountstatements since Management is responsible for the preparation and fairthe presentation of these financial in the last impairment loss was recognized. If that is the case the carrying amount of the accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, asset is increased to its recoverable amount. That to increased amount and cannot the of implementing and maintaining internal control relevant the preparation fair exceed presentation carrying amount that would have been determined, net of depreciation, had no impairment financial statements that are free from material misstatement, whether due to fraud or error; loss been recognized for the asset in prior years. is recognized in the that are selecting and applying appropriate accounting policies;Such and reversal making accounting estimates statement of income unless the asset is carried at revalued amount, in which case the reasonable in the circumstances. reversal is treated as a revaluation increase. Auditors’ Responsibility Retirement Costs retirementiscost is actuarially determined using the projected unitbased credit method. UnderWe Our The responsibility to express an opinion on these financial statements on our audits. this method, the current service cost is the present value of retirement benefits payable conducted our audits in accordance with Philippine Standards on Auditing. Those standardsinrequire services rendered in the Thetoliability that the we future complywith withrespect ethicalto requirements and plan andcurrent performperiod. the audit obtain recognized reasonable in the statement of financial position with respect to defined benefit pension assurance whether the financial statements are free from material misstatement.plans is the present value of the defined benefit obligation at the statement of financial position date less fair valueperforming of plan assets, if any, together any adjustments An audit involves procedures to obtainwith audit evidence aboutfor theunrecognized amounts and disclosures actuarial gains and losses and past service cost. The present value of thejudgment, defined benefit in the financial statements. The procedures selected depend on the auditor’s including obligation is determined by discounting the estimated future cash outflows using interest the assessment of the risks of material misstatement of the financial statements, whether due to rate on government terms to maturity approximating the terms of the fraud or error. In makingbonds thosethat risk have assessments, the auditors consider internal control relevant to related preparation retirement liability. gainsofand arising from experience the entity’s and fairActuarial presentation the losses financial statements in order to adjustments design audit and changes in actuarial assumptions are charged or credited to income the net an procedures that are appropriate in the circumstances, but not for the purposewhen of expressing cumulative unrecognized actuarial gains and losses at the end of the previous period opinion on the effectiveness of the entity’s internal control. exceeded 10% of the higher ofthe theappropriateness defined benefit of obligation andpolicies the fair used valueand of plan An audit also includes evaluating accounting the assets at that date. These gains or losses are recognized over the expected average reasonableness of accounting estimates made by management, as well as evaluating the overall remainingofworking lives of the employees participating in the retirement plan. presentation the financial statements. pastthat service cost evidence is recognized as an expenseison a straight-line basis overtothe We The believe the audit we have obtained sufficient and appropriate provide a basis average period until the benefits become vested. If the benefits are already vested for our audit opinion. immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SECdefined Accreditation No. 0012-FR-1 The defined benefit liability is the aggregate of the present value of the benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be INDEPENDENT AUDITORS’ REPORT settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate and the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from and the plan or reductions in the future contributions to the plan. The Stockholders the Board of Directors

PetroEnergy Resources Corporation Income 7th Floor, JMTTax Building Current ADB Avenue,Income Ortigas Tax Center, Pasig City Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and audited tax lawsthe used to compute the amount are thoseofthat are enacted or substantially We have accompanying financial statements PetroEnergy Resources Corporation, enacted at the statement of financial position date. which comprise the statements of financial position as at December 31, 2009 and 2008, and the

statements of income, statements of comprehensive income, statements of changes in equity and Deferred Income Tax statements of cash flows for each of the three years in the period ended December 31, 2009, and a Deferred income tax is provided, using theother balance sheet liability summary of significant accounting policies and explanatory notes.method, on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying for amounts for financial reporting purposes. Management’s Responsibility the Financial Statements Deferredisincome tax liabilities are recognized taxable temporary Management responsible for the preparation andfor fairall presentation of thesedifferences. financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Deferredand income tax assets are recognized for all to deductible temporary implementing maintaining internal control relevant the preparation and differences, fair presentation of carryforward of unused tax credits from excess minimum corporate income taxor(MCIT) financial statements that are free from material misstatement, whether due to fraud error; over regular corporate income tax and unused net operating losses carryover (NOLCO), theare selecting and applying appropriate accounting policies; and making accounting estimatesto that extent that it is probable that taxable profit will be available against which the deductible reasonable in the circumstances. temporary differences, and the carryforward of unused tax credits from excess MCIT and unexpired NOLCO can be utilized. Auditors’ Responsibility The carryingisamount of deferred income tax assets is reviewed at each statement of Our responsibility to express an opinion on these financial statements based on our audits. We financial position date and reduced to the extent that it is no longer probable that sufficient conducted our audits in accordance with Philippine Standards on Auditing. Those standards require taxable profit be available to allow allplan or part the deferred income tax asset to be that we comply withwill ethical requirements and andofperform the audit to obtain reasonable utilized. Unrecognized deferred income tax assets are reassessed at each statement of assurance whether the financial statements are free from material misstatement. financial position date and are recognized to the extent that it has become probable that future taxable profit will procedures allow the deferred taxaudit assetevidence to be recovered. An audit involves performing to obtain about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including Deferred income tax assets and liabilities are measured at the tax rates thatwhether are expected the assessment of the risks of material misstatement of the financial statements, due to to apply to the year when the asset is realized or the liability is settled, based on tax rates to fraud or error. In making those risk assessments, the auditors consider internal control relevant (and tax laws) that have been enacted or substantially enacted at the statement of financial the entity’s preparation and fair presentation of the financial statements in order to design audit position date. procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Deferred income evaluating tax assets and liabilities are offset, if a legally policies enforceable An audit also includes the appropriateness of accounting usedright and exists the to set off current tax assets against current income tax liabilities and the deferred income reasonableness of accounting estimates made by management, as well as evaluating the overall taxes relate the same taxable entity and the same taxation authority. presentation of thetofinancial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

Leases BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1 The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date whether the fulfillment of the arrangement is dependentAUDITORS’ on the use ofREPORT a specific asset or the arrangement conveys a right to use the INDEPENDENT asset. A reassessment is made after inception of the lease only if one of the following applies: There is a and change in contractual terms, other than a renewal or extension of the The(a) Stockholders the Board of Directors arrangement; PetroEnergy Resources Corporation (b) A renewal option is exercised or extension granted, unless the term of the renewal or 7th Floor, JMT Building extension was initially Pasig included in the lease term; ADB Avenue, Ortigas Center, City (c) There is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) There is athe substantial changefinancial to the asset. We have audited accompanying statements of PetroEnergy Resources Corporation,

which comprise the statements of financial position as at December 31, 2009 and 2008, and the Where aofreassessment is made, lease accountingincome, shall commence frominthe dateand statements income, statements of comprehensive statementsorofcease changes equity when the in circumstances to the reassessment forDecember scenarios 31, (a), 2009, (c) or and a statements of change cash flows for each of thegave threerise years in the period ended (d) and at the date of renewal or extension period for scenario (b). summary of significant accounting policies and other explanatory notes. Leases where the lessor retains substantially the risks and benefits of ownership of the Management’s Responsibility for the Financialall Statements asset are classified as operating leases. Operating lease payments are recognized as an expense inisthe statementfor ofthe income on a straight line basis over the leasefinancial term. statements in Management responsible preparation and fair presentation of these accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Research and and maintaining Development Costs control relevant to the preparation and fair presentation of implementing internal Research costs are expensed as incurred. Development expenditures onfraud an individual financial statements that are free from material misstatement, whether due to or error; project are recognized as an intangible asset when the Company can demonstrate all that of are selecting and applying appropriate accounting policies; and making accounting estimates the following: reasonable in the circumstances.

 The technical feasibility of completing the intangible asset so that it will be available for Auditors’ Responsibility use or sale; Its intention to express completeanand its ability to usefinancial or sell the asset; based on our audits. We Our responsibility is to opinion on these statements  How the asset will generate future economic benefits; conducted our audits in accordance with Philippine Standards on Auditing. Those standards require availability of resources to complete the asset; and the audit to obtain reasonable that we The comply with ethical requirements and plan and perform  Thewhether ability tothe measure the expenditure during development. assurance financialreliably statements are free from material misstatement. Provisions An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Provisions recognized when (a) the Company has a present (legal or including in the financial are statements. The procedures selected depend on the obligation auditor’s judgment, constructive)ofasthe a result of material a past event, (b) it is probable that an statements, outflow of resources the assessment risks of misstatement of the financial whether due to embodying economic benefits be required the to settle the obligation and (c)control a reliable fraud or error. In making those riskwill assessments, auditors consider internal relevant to estimatepreparation can be made thepresentation amount of the obligation. the effect of time the entity’s andoffair of the financialIfstatements inthe order to value designofaudit money isthat material, provisionsinare by discounting future cash flows procedures are appropriate thedetermined circumstances, but not for the the expected purpose of expressing an at a on pretax rate that reflects current market assessment opinion the effectiveness of the entity’s internal control. of the time value of money and, where appropriate, the risks specific to the liability.ofWhere discounting used,and thethe An audit also includes evaluating the appropriateness accounting policiesisused increase in the provision due to the passage time is recognized asas anevaluating interest expense. reasonableness of accounting estimates made byofmanagement, as well the overall presentation of the financial statements. Contingencies not recognized the financial statements. They are disclosed We Contingent believe thatliabilities the auditare evidence we have in obtained is sufficient and appropriate to provide a basis unless possibility of an outflow of resources embodying economic benefits is remote. for our auditthe opinion. Contingent assets are not recognized in the financial statements but disclosed when an inflow of economic benefit is probable.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

Borrowing Costs BOA/PRC Reg. No. 0001 SEC Accreditation of No.an 0012-FR-1 Borrowing costs directly attributable to the acquisition, construction or production asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the costs of the respective assets. All other borrowing costs INDEPENDENT AUDITORS’ REPORT are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Foreign Exchange Transactions and Translations The Stockholders and the Board of Directors The functional and presentation currency of the Company is the U.S. Dollar. Transactions PetroEnergy Resources Corporation in foreign currencies are initially recorded in the functional currency rate at the date of the 7th Floor, JMT Building transaction. Monetary assets and liabilities denominated in foreign currencies are ADB Avenue, Ortigas Center, Pasig City translated at the functional currency rate of exchange ruling at the statement of financial position date. Differences arising from translation of monetary assets and liabilities are taken to the the statement of income under “Net unrealized foreign exchange gain (loss)”. We have audited accompanying financial statements of PetroEnergy Resources Corporation,

which comprise the statements of financial position as at December 31, 2009 and 2008, and the Basic/Diluted Earnings Per Share statements of income, statements of comprehensive income, statements of changes in equity and Basic earnings per share areofcomputed the in basis the weighted average number of and a statements of cash flows for each the threeon years the of period ended December 31, 2009, shares outstanding during the year after giving retroactive effect for any stock dividends summary of significant accounting policies and other explanatory notes. declared in the current year. Management’s Responsibility for the Financial Statements Diluted earnings per share are computed on the basis of the weighted average number of shares outstanding during the preparation year plus the weighted average number ordinarystatements shares Management is responsible for the and fair presentation of theseoffinancial in that would be issued on the conversion of all the dilutive potential ordinary shares into accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, ordinary and shares. implementing maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; Segment Information selecting and applying appropriate accounting policies; and making accounting estimates that are The Company has not provided segment information since it has only one (1) business reasonable in the circumstances. segment (oil operations) and currently, it operates one (1) geographical segment (Gabon, WestResponsibility Africa) since its Philippine operations is still in exploration stage/phase and has not Auditors’ yet started commercial production. In addition, the renewable energy project entered into by the Company still in pre-development stage and nostatements revenue has been Our responsibility is to is express an opinion on these financial based onrecognized our audits.yet. We

conducted our audits in accordance with Philippine Standards on Auditing. Those standards require Subsequent Events that we comply with ethical requirements and plan and perform the audit to obtain reasonable Post year-end events that provide additional information about the Company’s situation at assurance whether the financial statements are free from material misstatement. the statement of financial position date (adjusting events) are reflected in the financial statements, if any. Postprocedures year-end events thataudit are not adjusting events are disclosed in the An audit involves performing to obtain evidence about the amounts and disclosures notes when material. in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to July 15, Securities and Exchange (SEC)internal issued control SEC relevant to fraud On or error. In 2009, makingthe those risk assessments, theCommission auditors consider Memorandum Circular 8, Series of 2009 which covers scales of fines for non-compliance the entity’s preparation and fair presentation of the financial statements in order to design audit with the financial reporting in requirements of the SEC. The circular provides procedures that are appropriate the circumstances, but not formemorandum the purpose of expressing an guidance on what it considered as material deficiency. Accordingly, the Company updates opinion on the effectiveness of the entity’s internal control. its significant accounting policies in compliance with the said memorandum An audit also includes evaluating the appropriateness of accounting policies usedcircular. and the The following significant accounting policies, in addition to those disclosed in the Company’s reasonableness of accounting estimates made by management, as well as evaluating the overall 2008 audited presentation of the financial financial statements, statements. were consistently applied by the Company in its annual financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Equity The company records common stocks at par value and additional paid-in capital in excess of the total contributions over the aggregate par values of the equity shares. INDEPENDENT AUDITORS’received REPORT When the Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from net and of tax. member of the Company purchases the Company’s Theproceeds, Stockholders theWhen Boardany of Directors capital stock (treasury shares), the PetroEnergy Resources Corporation consideration paid, including any attributable incremental costs, is deducted from equity attributable to the Company’s equity holders 7th Floor, JMT Building until the shares areCenter, cancelled, reissued ADB Avenue, Ortigas Pasig City or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related tax effects is included in equity.

We have audited the accompanying financial statements of PetroEnergy Resources Corporation, Retained earnings representofaccumulated earnings the Company less dividends which comprise the statements financial position as atofDecember 31, 2009 and 2008, and the declared. statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a Costs of and Expenses summary significant accounting policies and other explanatory notes. Oil production and operating expenses’ are costs incurred to sell crude oil inventories, including transportation, storage andFinancial loading, among others. General and administrative Management’s Responsibility for the Statements expenses constitute costs of administering the business. Costs and expenses are recognized incurred. for the preparation and fair presentation of these financial statements in Management is as responsible

accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of 3. Significant Accounting Judgments, Estimates and Assumptions financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are The preparation of the financial statements in accordance with PFRS requires the reasonable in the circumstances. Company to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and the disclosure of contingent assets and Auditors’ Responsibility contingent liabilities, at the reporting date. However, uncertainty about these assumptions estimatesiscould result in that could requirestatements a material adjustment to audits. the Our and responsibility to express anoutcomes opinion on these financial based on our We carrying amount of the asset or liability affected in the future. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable Judgments assurance whether the financial statements are free from material misstatement. In the process of applying the Company’s accounting policies, management has made the following judgment, apart procedures from those involving estimations, which has the most significant An audit involves performing to obtain audit evidence about the amounts and disclosures effect on the amounts recognized in the financial statements: in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to Determination of Fair those Valuesrisk of Financial Assets Liabilities fraud or error. In making assessments, theand auditors consider internal control relevant to The fair value determinations for financial assets and liabilities are based generally on audit the entity’s preparation and fair presentation of the financial statements in order to design listed market prices or broker or dealer price quotations. If prices are not readily procedures that are appropriate in the circumstances, but not for the purpose of expressing an determinable or if liquidating theentity’s positions is reasonably opinion on the effectiveness of the internal control. expected to affect market prices, fair value is based on either internal valuation models or management’s An audit also includes evaluating the appropriateness of accounting policies estimate used andofthe amounts that could be realized under current market conditions, assuming an orderly reasonableness of accounting estimates made by management, as well as evaluating the overall liquidation over a reasonable period of time. presentation of the financial statements. Functional Currency We Determination believe that theofaudit evidence we have obtained is sufficient and appropriate to provide a basis Theaudit Company determines the functional currency based on economic substance of for our opinion. underlying circumstances relevant to the Company. The functional currency has been determined to be the U.S. Dollar since its revenues and expenses are substantially denominated in U.S. Dollar.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Operating Lease Commitments - Company as Lessor The Company has entered into commercial property leases on its investment property portfolio. The Company REPORT has determined, based on an evaluation of the terms and INDEPENDENT AUDITORS’ conditions of the arrangement, that it retains all the significant risks and rewards of ownership of these properties and so accounts for the contracts as operating leases.

Capitalizationand of Development Costs The Stockholders the Board of Directors Development costs are capitalized in accordance with the accounting policy discussed in PetroEnergy Resources Corporation Note 2. Initial capitalization of costs is based on management’s judgment that 7th Floor, JMT Building technological and economical feasibility is confirmed, usually when a product development ADB Avenue, Ortigas Center, Pasig City project has reached a defined milestone according to an established project management model. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, Company has determined that allposition expenditures incurred in 31, wind energy whichThe comprise the statements of financial as at December 2009 andproject 2008, and the (excluding the wind mast which is recognized as property and equipment in the in statement statements of income, statements of comprehensive income, statements of changes equity and of financial position) areeach considered research As of December statements of cash flows for of the three yearsexpenditures. in the period ended December31, 31,2009, 2009,the and a Company has recognized research expenditures amounting to $91,101 in the statement of summary of significant accounting policies and other explanatory notes. income (see Note 18). Management’s Responsibility for the Financial Statements Estimates Assumptions Management is and responsible for the preparation and fair presentation of these financial statements in The key assumptions concerning the future and other key of estimation uncertainty accordance with Philippine Financial Reporting Standards. Thissources responsibility includes: designing, at the statement of financial position date that have a significant risk of causing a materialof implementing and maintaining internal control relevant to the preparation and fair presentation adjustment to the of assets and liabilities within due the next financial year financial statements thatcarrying are freeamounts from material misstatement, whether to fraud or error; are discussed below. selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Impairment of Receivables The Company reviews its receivables to assess impairment at least on an annual basis. In Auditors’ Responsibility determining whether an impairment loss should be recorded in the statement of income, the Companyismakes judgments as toon whether there is any observable data thatWe Our responsibility to express an opinion these financial statements based onindicating our audits. there is a measurable decrease in the estimated future cash flows from its receivables. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require This evidence includes direct about the of the that we comply with normally ethical requirements andinformation plan and perform thefinancial audit to condition obtain reasonable borrower. assurance whether the financial statements are free from material misstatement. Allowance impairment losses aretodetermined on individual An audit involvesfor performing procedures obtain auditbased evidence about theassessment. amounts andBased disclosures on the Company’s assessment, no objective evidence of impairment exists as at including in the financial statements. The procedures selected depend on the auditor’s judgment, December of 31,the 2009 and therefore, no impairment losses statements, were recognized. The the assessment risks of 2008, material misstatement of the financial whether due to allowance for impairment losses as of December 31, 2009 and 2008 are carryover from to fraud or error. In making those risk assessments, the auditors consider internal control relevant prior years. the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an The value of receivables amounted $1,573,510 and $1,291,148 as of opinion oncarrying the effectiveness of the entity’s internalto control. December 31, 2009 and 2008, respectively. Accumulated impairment amounted to An audit also includes evaluating the appropriateness of accounting policies losses used and the $58,062 and $56,449 as of December 31, 2009 and 2008 (see Note 6). reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Estimating Proved Company Oil Reserves The Company assesses its estimate ofobtained proved reserves on an basis. toThe We believe that the audit evidence we have is sufficient andannual appropriate provide a basis Company estimates its reserves of oil in accordance with accepted volumetric methods, for our audit opinion. specifically the probabilistic method of estimation. Probabilistic method uses known geological, engineering and economic data to generate a range of estimates and their associated probabilities.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Estimating Useful Lives of Property and Equipment The Company reviews on an annual basis the estimated useful lives of property and equipment based on expected asset utilization as anchored on business plans and INDEPENDENT AUDITORS’ REPORT strategies that also consider expected future technological developments and market behavior.

is possible that results operations could be materially affected by changes in TheItStockholders andfuture the Board of of Directors these estimates brought about by PetroEnergy Resources Corporation changes in the factors mentioned. A reduction in the estimated lives of property and equipment would increase the recorded depreciation 7th Floor, JMTuseful Building and amortization and decrease noncurrent assets. ADB Avenue, Ortigasexpense Center, Pasig City As of December 31, 2009 and 2008, the Company’s property and equipment amounted to $12,578,532 respectively (see Note of 8).PetroEnergy Resources Corporation, We $12,052,491 have audited and the accompanying financial statements

which comprise the statements of financial position as at December 31, 2009 and 2008, and the Impairment on Non-financial statements of income, statementsAssets of comprehensive income, statements of changes in equity and The Company impairment on its years non-financial assetsended (e.g.,December property and statements of cashassesses flows for each of the three in the period 31, 2009, and a equipment, investment property and crude oil inventory) whenever events or changes in summary of significant accounting policies and other explanatory notes. circumstances indicate that the carrying amount of an asset may not be recoverable. Among others, the factors that important which could trigger an Management’s Responsibility forthe theCompany Financialconsiders Statements impairment review on its non-financial assets include the following: Management is responsible for the preparation and fair presentation of these financial statements in For property equipment and investment property, anThis impairment loss isincludes: recognized accordance with and Philippine Financial Reporting Standards. responsibility designing, whenever the carrying amount of an asset exceeds its recoverable amount. implementing and maintaining internal control relevant to the preparation and fairThe presentation of recoverable amount thefree higher an asset’s net selling price anddue value in use.or The net financial statements that is are fromofmaterial misstatement, whether to fraud error; selling price is the amount obtainable from the sale of an asset in an arm’s length selecting and applying appropriate accounting policies; and making accounting estimates that are transaction while value in use is the present value of estimated future cash flows expected reasonable in the circumstances. to arise from the continuing use of an asset and from its disposal at the end of its useful life. Responsibility Auditors’ are estimated assetsstatements or, if it is notbased possible, foraudits. the Our Recoverable responsibilityamounts is to express an opinionforonindividual these financial on our We cash-generating unit to which the asset belongs. For impairment loss on specific assets, conducted our audits in accordance with Philippine Standards on Auditing. Those standards require represents the netplan selling that the we recoverable comply with amount ethical requirements and andprice. perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. In determining the present value of estimated future cash flows expected to be generated from involves the continued use ofprocedures property and investment the Company An audit performing to equipment obtain auditand evidence aboutproperty, the amounts and disclosures is required to make estimates and assumptions that can materially affect the financialincluding in the financial statements. The procedures selected depend on the auditor’s judgment, statements. of the risks of material misstatement of the financial statements, whether due to the assessment fraud or error. In making those risk assessments, the auditors consider internal control relevant to Crude oil inventory is written down to net of realizable valuestatements (NRV) if the cost may not beaudit the entity’s preparation and fair presentation the financial in order to design recoverable. NRV is the net selling price in the ordinary course of business less the procedures that are appropriate in the circumstances, but not for the purpose of expressing an estimated costs of completion and the estimated costs necessary to make the sale. opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the As of December 31, 2009 and 2008, the carrying value of theas Company’s crude oil the overall reasonableness of accounting estimates made by management, well as evaluating inventory amounted to $131,303 and $308,939, respectively; the carrying value of property presentation of the financial statements. and equipment amounted to $12,052,491 and $12,578,532 (see Note 8); the carrying value investment property amounted $31,417 (see is Note 10). and appropriate to provide a basis We of believe that the audit evidence wetohave obtained sufficient for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Impairment and Write-off of Deferred Oil Exploration Costs The Company assesses impairment on deferred oil exploration costs when facts and circumstances suggest that the carrying amount of the asset may exceed its recoverable INDEPENDENT AUDITORS’ REPORT amount. Until the Company has sufficient data to determine technical feasibility and commercial viability, deferred oil exploration costs need not be assessed for impairment.

Facts and circumstances that require an impairment assessment as set forth in The Stockholders and the Board of would Directors PFRS 6, Exploration for and Evaluation of Mineral Resources, are as follows: PetroEnergy Resources Corporation 7th Floor, JMT Building  The period which Pasig the Company has the right to explore in the specific area has ADB Avenue, Ortigasfor Center, City expired or will expire in the near future, and is not expected to be renewed;  Substantive expenditure on further exploration for and evaluation of mineral resources the specific area is neither budgeted nor planned; We have in audited the accompanying financial statements of PetroEnergy Resources Corporation,  Exploration for and evaluation of mineral in the specific area notand ledthe to which comprise the statements of financial positionresources as at December 31, 2009 andhave 2008, the discovery of commercially viable quantities of mineral resources and the entity has statements of income, statements of comprehensive income, statements of changes in equity and decided discontinue activities in theinspecific area; and December 31, 2009, and a statements of cashtoflows for eachsuch of the three years the period ended  Sufficient data exist to indicate that, although a development in the specific area is summary of significant accounting policies and other explanatory notes. likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. Management’s Responsibility for the Financial Statements The carrying value of deferred oil exploration amounted toof$4,073,670 and statements in Management is responsible for the preparation andcosts fair presentation these financial $4,499,993 as of December 31, 2009 and 2008, respectively (see Note 9). accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of Accrued Retirement Liability and material Retirement Expense whether due to fraud or error; financial statements that are free from misstatement, The determination of the Company’s accrued retirement obligation and annual retirement selecting and applying appropriate accounting policies; and making accounting estimates that are expense is dependent on the selection of certain assumptions used in the actuarial reasonable in the circumstances. calculations. Those assumptions include, among others, discount rates, expected return on plan assets and salary increase rates (see Note 15). Auditors’ Responsibility While the Company believes that the on assumptions are reasonable appropriate, Our responsibility is to express an opinion these financial statements and based on our audits. We significant differences betweenwith actual experiences and assumptions materially affect conducted our audits in accordance Philippine Standards on Auditing.may Those standards require thecomply Company’s accrued retirement obligation and perform annual retirement that we with ethical requirements and plan and the audit toexpense. obtain reasonable assurance whether the financial statements are free from material misstatement. Accrued retirement liability amounted to $45,409 and $38,737 as of December 31, 2009 andinvolves 2008, respectively Notes 14 15). An audit performing (see procedures to and obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including Asset Retirement Obligation the assessment of the risks of material misstatement of the financial statements, whether due to and abandonment costs based on estimates made by theinternal service control contractrelevant to fraud Plug or error. In making those risk are assessments, the auditors consider operator. The timing of future expenditures are reviewed annually. Liability the entity’s preparation andand fair amount presentation of the financial statements in order to design audit and capitalized costs included in circumstances, property and equipment is the equal to the of present value an of procedures that are appropriate in the but not for purpose expressing theon Company’s proportionate share ininternal the total plug and abandonment costs of the opinion the effectiveness of the entity’s control. consortium on initial recognition. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall The amount asset retirement obligation in the statement of financial position is increased presentation of theoffinancial statements. by the accretion expense charged to operations using the effective interest rate method over the estimated termhave of the obligation. We believe that the auditremaining evidence we obtained is sufficient and appropriate to provide a basis for our audit opinion. Asset retirement obligation as of December 31, 2009 and 2008 amounted to $299,967 and $181,061 respectively (see Notes 13 and 14).

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Deferred Tax Assets The Company reviews the carrying amounts of deferred tax assets at each statement of financial position date andREPORT reduces them to the extent that it is no longer probable that INDEPENDENT AUDITORS’ sufficient future taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Company believes that it will generate sufficient future taxable profit to allow all of the deferred tax assets to be utilized.

The Stockholders and the Board of Directors Deferred Resources tax assets -Corporation net amounted to $87,365 as of December 31, 2009 and deferred tax PetroEnergy liability net amounted to $102,682 as of December 31, 2008 (see Notes 14 and 16). 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City 4. Cash and Cash Equivalents We have audited the accompanying financial statements of PetroEnergy Resources Corporation, This accountthe consists of: of financial position as at December 31, 2009 and 2008, and the which comprise statements statements of income, statements of comprehensive income, statements of changes in equity and 2009 2008 and a statements of cash flows for each of the three years in the period ended December 31, 2009, $58,572 Cash on hand and in banks $158,714 summary of significant accounting policies and other explanatory notes. Short-term investments

Management’s Responsibility for the Financial Statements

1,831,207 $1,889,779

1,189,895 $1,348,609

Cash in bank earns interest at the prevailingand bank rates. of Short-term deposits are Management is responsible for the preparation fairdeposit presentation these financial statements in made for varying periods of up to three months depending on the immediate cash accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, requirements the Company, andcontrol earn interest at to thethe prevailing short-term rates. of implementing andof maintaining internal relevant preparation and fairdeposit presentation financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are 5. Financial Assets at FVPL reasonable in the circumstances. This account consists of: Auditors’ Responsibility 2009 2008 We Our responsibility is to express an opinion on these financial statements based on our audits. $1,997,817 Marketable debt securities $527,030 conducted our audits in accordance with Philippine Standards on Auditing. Those standards require 38,470 Marketable equity securities 31,127 that we comply with ethical requirements and plan and perform the audit to obtain reasonable 12,131 Investment in golf club shares 15,151 assurance whether the financial statements are free from material misstatement. $2,048,418 $573,308

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Financial assets at FVPL are presented net of accumulated net unrealized losses in the financial statements. The procedures selected depend on the auditor’s judgment, including amounting toof$90,865 $100,343misstatement as of December 31,financial 2009 and 2008, respectively. Netto the assessment the risksand of material of the statements, whether due gain (loss) on fair value changes on financial assets at fair value through profit and loss fraud or error. In making those risk assessments, the auditors consider internal control relevant to includedpreparation in statements income amounted to $9,786, and $3,713 2009,audit the entity’s andoffair presentation of the financial($30,913), statements in order toindesign 2008 and 2007, respectively. procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 24 6. Receivables

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

This account consists of:REPORT INDEPENDENT AUDITORS’ Accounts receivable Consortium operator The Stockholders and the Board of Directors Others PetroEnergy Resources Corporation Interest receivable

7th Floor, JMT Building ADB Avenue, Center, Pasig City Less Ortigas allowance for impairment losses

2009

2008

$1,558,457 8,588 64,527 1,631,572 58,062 $1,573,510

$1,327,074 2,074 18,449 1,347,597 56,449 $1,291,148

We have the accompanying statements of PetroEnergy Resources Corporation, The audited Company’s receivables arefinancial mainly due from consortium operator and are due within whichone comprise the statements of financial position as at December 31, 2009 and 2008, and the year. Carrying values as of year-end approximate fair values. statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the the disclosure three yearsofinreconciliation the period ended December 2009, and a The table below demonstrates of allowance for 31, impairment summary of significant accounting policies and other explanatory notes. losses for receivables from a consortium operator: Management’s Responsibility for the Financial Statements

2009 2008 $56,449 Beginning balances $50,472 Management is responsible for the preparation and fair presentation of these financial statements in 1,613 includes: designing, Effect of Philippine foreign currency translation 5,977 accordance with Financial Reporting Standards. This responsibility $58,062 Ending Balance $56,449 implementing and maintaining internal control relevant to the preparation and fair presentation of

financial statements that are free from material misstatement, whether due to fraud or error; Allowance for impairment losses are determined on individual assessment. selecting and applying appropriate accounting policies;based and making accounting estimatesThere that are were no additions to this account as of December 31, 2009 and 2008. Based on the reasonable in the circumstances. Company’s assessment, no objective evidence of impairment exists as at December 31, 2009 and 2008, therefore, no impairment losses were recognized. Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted ourexpenses audits in accordance with Philippine 7. Prepaid and other current assetsStandards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whetherconsists the financial This account of : statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the 2009amounts and disclosures 2008 in the financial statements. The procedures selected depend on the auditor’s judgment, including $111,890 Input value added tax (VAT) $89,288 the assessment of cash the risks of material misstatement of the financial statements, whether63,125 due to 63,125 Restricted fraud or error. In making those risk assessments, the auditors consider internal control relevant 14,922 Prepaid expenses 11,008 to the entity’s preparation and fair presentation of the financial statements in order to design audit – Prepaid tax 22,594 procedures that are appropriate in the circumstances, but not for the purpose of expressing an – Health insurance fund 10,202 opinion on the effectiveness of the entity’s internal control. 6,953 Others 7,980 An audit also includes evaluating the appropriateness of accounting policies used and the $196,890 $204,197 reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Restricted cash represents the Company’s share in the escrow fund to secure payment and discharge of Company’s and liabilities underand theappropriate Floating Production We believe that the audit evidence obligations we have obtained is sufficient to provide a basis and Offloading (FPSO) contract. The amount was deducted from the Company’s for ourStorage audit opinion. share on lifting proceeds during the first lifting made by Etame in November 2002 and will be paid back to the Company at the end of the contract.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of Directors PetroEnergy Resources Corporation 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 26 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 accommodate the processing capacity of the Floating Production Storage and Offloading (FPSO) vessel Petroleo Nautipa. Twelve (12) liftings (sales) were made during the year with an average lifting volume of 694,018 barrels. INDEPENDENT AUDITORS’ REPORT

In December 2008, appraisal and development drilling in the Ebouri, the third oil field, in the Etame Block began. Two jack up drilling rigs, the GSF Adriatic VI and the Pride Cabinda were in the operation as Directors of year-end. The first horizontal development well, the The Stockholders and Board of Ebouri-2H, was completed on December 15, 2008 while the appraisal well North Ebouri-1 PetroEnergy Resources Corporation was also successfully drilled, confirming a wider reservoir area. Consequent to this finding, 7th Floor, JMT Building a sidetrack well, the North Ebouri-ST-1, was initiated at year end to confirm the revised ADB Avenue, Ortigas Center, Pasig City Ebouri oil field map and to locate an optimal position for a second horizontal production well. The North Ebouri sidetrack encountered substantial oil-filled Gamba sandstone and established additional reserves north of the originally mapped field development We have audited significant the accompanying financial statements of PetroEnergy Resources Corporation, outline. which comprise the statements of financial position as at December 31, 2009 and 2008, and the

statements of income, statements of comprehensive income, statements of changes in equity and Two prospects, the North Etame and the years Southeast to be statements of cash flows for each of the three in theEtame, period were endedintended December 31,drilled 2009, and a back to back by the Pride Cabinda after drilling the appraisal well North Ebouri-1. The summary of significant accounting policies and other explanatory notes. North Etame well, however, encountered water bearing sands and has been abandoned. Management’s Responsibility for the Financial Statements The third prospect, the South East Etame, scheduled to be drilled during the second or third quarter of 2009 had put off untiland Q1 fair of 2010. Management is responsible forbeen the preparation presentation of these financial statements in

accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, The Ebouri platform was relevant installed to onthe sitepreparation in the third and quarter of 2008 implementing andproduction maintaining internalthat control fair presentation of received the first oil from the first production well in January 2009 and from the financial statements that are free from material misstatement, whether due to fraud orsecond error; production well in appropriate April 2009. accounting policies; and making accounting estimates that are selecting and applying reasonable in the circumstances. Realignment Agreement (RA) The drilling of the North Ebouri and South East Etame Appraisal Wells were conducted as Auditors’ Responsibility Exclusive Operations, since one of the joint venture (JV) partners, Sasol Petroleum Etame Limited (Sasol), not give consent the same. the Consenting Our responsibility is todid express anits opinion on to these financialSubsequently, statements based on our audits. We Parties (all other parties except Sasol) drilled the North Ebouri Sidetrack and standards the EEBOMconducted our audits in accordance with Philippine Standards on Auditing. Those require 3H Development Well as continuation of the North Ebouri Exclusive Operation. that we comply with ethical requirements and plan and perform the audit to obtain reasonable

assurance whether the financial statements are free from material misstatement. Sasol later on sought the reinstatement of its rights over the North Ebouri Exclusive Operation. asobtain to theaudit interpretation the Joint Operating An audit involves However, performingdisagreement procedures to evidenceof about the amounts and disclosures Agreement (JOA) in relation to such reinstatement arose which eventually promptedincluding the JV in the financial statements. The procedures selected depend on the auditor’s judgment, partners to enter into a RA. the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to Underpreparation the RA, Sasol be reinstatedoftothe all financial of its rights as if the North Ebouri Exclusive the entity’s andshall fair presentation statements in order to design audit Operation were conducted with the consent of all the joint venture partners, subject to an procedures that are appropriate in the circumstances, but not for the purpose of expressing Sasol’s for each of the Consenting opinion on thepayment effectiveness of the entity’s internalParty’s control.share in the cash calls for Petroleum Cost including both capital and operating expenses from the effective the the RA until An audit also includes evaluating the appropriateness of accounting policiesdate usedofand the aggregate amount paid by Sasol has reached US$15 million, and immediate reasonableness of accounting estimates made by management, as well as evaluating the overall reimbursement of all past costs related to the North Ebouri Exclusive Operation amounting presentation of the financial statements. to $12.65 million. Sasol shall recover the $15 million through the Cost Oil Entitlement accrued in the relation We believe that auditthereto. evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In relation to the above realignment, the Company received reimbursement from Sasol of $456,450 representing Sasol’s share of the costs and expenses relating to wells, platforms and other facilities which was previously shouldered by the Company in behalf of Sasol.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 27 - 27 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

The share of the Company on the cash calls amounted to $541,071. SEC Accreditation No. 0012-FR-1 The share of the Company on the cash calls amounted to $541,071. Philippine Operations INDEPENDENT AUDITORS’ REPORT Philippine Operations The Company has a working interest in Block “C” of SC No. 14 situated in offshore The Company has awhere working in Block of SC No. 14 situated in offshore Northwest Palawan oil interest discoveries were“C” made. Northwest Palawan where oil discoveries were made. Contract 14-C of Directors TheService Stockholders and(SC) the Board Service Contract (SC) 14-C On December 15, 1975, pursuant to Section 7 of the Oil Exploration and Development Act PetroEnergy Resources Corporation On December 15,venture 1975, pursuant Section 7 of the Oil Exploration of 1972, the joint partners to entered into a service contract withand theDevelopment Philippine Act 7th Floor, JMT Building of 1972, the joint venture partners entered into afor service contract with the Philippine Government through the Department of Energy the exploration, exploitation and ADB Avenue, Ortigas Center, Pasig City Government the area Department of Energy for the exploration, exploitation development through of contract in northwest offshore Palawan, Philippines, whichand was development contract areaThis in northwest offshore Palawan, Philippines, whichsignificant was amended fromoftime to time. contract area includes the Galoc Field where amended fromdeposits time to time. This contract area includes the Galoc Field where significant hydrocarbons were discovered. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, hydrocarbons deposits West Linapacan Oilfieldwereofdiscovered. which comprise the statements financial position as at December 31, 2009 and 2008, and the West Linapacan Oilfield Pitkin Petroleum Ltd. of the United States of America completed during first quarter of and statements of income, statements of comprehensive income, statements of the changes in equity Pitkin Petroleum Ltd. of the United States of America completed during the first quarter of 2008 a farm-in the Service 14-C WestinLinapacan the following terms: statements of cash to flows for eachContract of the three years the period on ended December 31, 2009, and a 2008 a farm-in to the Service Contract 14-C West Linapacan on the following terms: summary of significant accounting policies and other explanatory notes.  To earn 58.29075% participating interest in consideration of $1,500,000 and to pay the  To interest inStatements consideration of $1,500,000 and to pay the costearn of a58.29075% G & G Workparticipating Program; Management’s Responsibility for the Financial of a & Gthe Work Program;  cost Option toG fund drilling of one well; and  Option fund ofpreparation one costs well; and Optionisto toresponsible fund the the drilling development ofand thefair oilfield attributable to the financial participating Management for the presentation of these statements in  Option to fund the development costs of the oilfield attributable to the interest of the Farmors. accordance with Philippine Financial Reporting Standards. This responsibilityparticipating includes: designing, interest of maintaining the Farmors.internal control relevant to the preparation and fair presentation of implementing and Galoc Oilfield financial statements that are free from material misstatement, whether due to fraud or error; Galoc Oilfield Teamand Oil and Capeappropriate Energy (Parties), both policies; foreign companies, a memorandum of are selecting applying accounting and makingsigned accounting estimates that Team Oil and Cape Energy (Parties), both foreign companies, signed a memorandum of agreement dated September 23, 2004 with the participants of SC No. 14-C regarding the reasonable in the circumstances. agreement dated 23,No. 2004 withGaloc the participants SC No. regarding development of a September portion of SC 14-C, area. The of Parties will14-C shoulder the the development of a portion of SCfor No.75% 14-C, area. Theinterest. Parties will the cost in exchange of Galoc the participating Theshoulder implementation of Auditors’ Responsibility development in satisfaction exchange for of the participating interest.22,The implementation this is subjectcost to the of 75% certain conditions. On August 2005, the Parties of is subject to theexpress satisfaction of certain conditions. Onstatements August 22,abased 2005, theour Parties assigned theiris rights and obligations toon Galoc Production Co., WLL, corporation Our this responsibility to an opinion these financial on audits. We assigned their rights and obligations to Galoc Production Co., WLL, a corporation organized in Bahrain with Vitol, a European oil trading company, as majority stockholder. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require Bahrain with Vitol, a European oil and trading company, as majority that organized we complyinwith ethical requirements and plan perform the audit to obtainstockholder. reasonable On October 7, 2007, the development of the Galoc oil field began which involved the assurance whether the financial statements are free from material misstatement. On October 7, the development of the Galoc oil field began which involved the construction of 2007, two subsea horizontal production wells under a so-called “batch drilling” construction of two subsea horizontal production wells under a so-called “batch drilling” program. Two production wells, Galoc-3 and Galoc-4 were drilled and later tied back to a An audit involves performing procedures to obtain audit evidence about the amounts and disclosures program. Two production wells, Galoc-3 and Galoc-4 were drilled and later tied back to a Floating Production Storage and Offloading (FPSO) facility via a seabed pipeline and midin the financial statements. The procedures selected depend on the auditor’s judgment, including Floating Production Storage and Offloading (FPSO) facility via a seabed pipeline and midwater riser system. the assessment of the risks of material misstatement of the financial statements, whether due to water riser In system. fraud or error. making those risk assessments, the auditors consider internal control relevant to Drilling of the Galoc-3 development wells was finalized in in order late January 2008 the entity’s preparation andand fairGaloc-4 presentation of the financial statements to design audit Drilling of the Galoc-3 and Galoc-4 development wells was finalized in late January 2008 and completion activities for production proceeded. During the middle of the year, a series procedures that are appropriate in the circumstances, but not for the purpose of expressing an and completion activities forthe production proceeded. During the middle of thedamaged year, a series of typhoons crossed the area. This hampered subsea operations and even opinion on the effectiveness of entity’s internal control. of typhoons crossed the area. This hampered subsea operations andfrom even damaged critical subsea equipment. Onthe October 9, 2008, oilofwas made to policies flow the fieldthe and An audit also includes evaluating appropriateness accounting used and critical subsea equipment. On October 9, 2008, oil was made to flow from the field and onto the production facility.estimates Since then, three totalingas604,683 of oil, the reasonableness of accounting made by cargoes management, well as barrels evaluating the overall onto the production facility. Since then, three cargoes totaling 604,683 barrels of oil, the last beingofon December 30, 2008 with 198,000 barrels, were offloaded to a buyer’s tanker. presentation the financial statements. last being on December 30, 2008 with 198,000 barrels, were offloaded to a buyer’s tanker. of 2009,we a series of bad weather in theand offshore Palawan We During believethe thatfirst thequarter audit evidence have obtained is sufficient appropriate to area provide a basis During first quarter of 2009, a series of bad weatherininthe theproduction offshore Palawan adversely affected operations and resulted to damage facilities.area for our auditthe opinion. adversely to damage in services the production facilities. Continuedaffected delays inoperations productionand andresulted mounting repair and costs prodded Continued delays in production and from mounting repair and services prodded PetroEnergy’s decision to withdraw the joint venture on Junecosts 30, 2009. PetroEnergy’s decision to withdraw from the joint venture on June 30, 2009.

*SGVMC113435* , *SGVMC113435* , *SGVMC113435*, 45 A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 28 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Farm-in Agreement (FA) On September 23, 2004, TEAM and CAPE entered into a FA with the SC No. 14-C - Galoc joint ventureAUDITORS’ partners forREPORT the development of the Galoc Field. The FA was concluded in a INDEPENDENT Deed of Assignment (DA) dated August 22, 2005 where TEAM and CAPE designated GPC as the special purpose company to accept the assigned participating interest and to act as operator of the Galoc production area.

The Stockholders and the Board of Directors Under the FA and DA, GPC will pay 77.721% of the cost to develop the Galoc Field in PetroEnergy Resources Corporation exchange for a 58.29075% participating interest in the area. Other significant terms and 7th Floor, JMT Building conditions of the Agreements ADB Avenue, Ortigas Center, Pasigare Cityas follows: 1) That GPC, together with the other paying party (Nido Petroleum), be allowed to first share of the development cost fromofcrude oil salesResources proceeds from the We have recover audited their the accompanying financial statements PetroEnergy Corporation, Galoc Field after production expenses. which comprise the statements of financial position as at December 31, 2009 and 2008, and the

statements of income, statements of comprehensive income, statements of changes in equity and 2) That GPC flows will beforassigned share $68 million cost statements of cash each of its thepro-rata three years in of thethe period ended historical December 31,recovery 2009, and a of the Galoc block equivalent to $34 million to be recovered pursuant to the terms of summary of significant accounting policies and other explanatory notes. the Block C agreement below. Management’s Responsibility for the Financial Statements 3) That GPC will reimburse the joint venture partners (except GPC and Nido Petroleum) for expenditures previously incurred inand relation to the Galoc of Field as financial follows: statements in Management is responsible for the preparation fair presentation these accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, a) $1.5 payable out ofcontrol 50% ofrelevant GPC’s to share of the Filipino Participation implementing and million maintaining internal the preparation and fair presentation of Incentive Allowance; and financial statements that are free from material misstatement, whether due to fraud or error; million payable upon reaching a cumulative production of 35 million barrels selecting b) and$1.5 applying appropriate accounting policies; and making accounting estimates that of are oil from the Galoc Field. reasonable in the circumstances.

Joint Responsibility venture partners as of December 31, 2007 consist of GPC (58.29075%), Nido Auditors’ Petroleum (22.279%), The Philodrill Corporation (Philodrill) (7.0175%), Alcorn Gold Resources Corporation (1.53075%), Energy Philippines Corporation Our responsibility is to express an opinion Forum on these financial statements based on(2.27575%), our audits. We Oriental Petroleum and Minerals Corporation (4.965%), Linacapan Oil Gas and Power require conducted our audits in accordance with Philippine Standards on Auditing. Those standards Corporation (2.607%) and PetroEnergy Resources Corporation (1.03425%). that we comply with ethical requirements and plan and perform the audit to obtain reasonable

assurance whether the financial statements are free from material misstatement. Extended Production Test (EPT) Agreement On involves August 10, 2006, anprocedures EPT agreement wasaudit madeevidence and entered into the DOEand anddisclosures GPC An audit performing to obtain about thebyamounts and its partners (referred to as “contractors” under the EPT agreement). The purpose of in the financial statements. The procedures selected depend on the auditor’s judgment, including the EPT is to obtain dynamic performance data for the Galoc reservoir and to confirm the the assessment of the risks of material misstatement of the financial statements, whether due to and continuity ofrisk at least 2 significant by undertaking an EPTto fraud presence or error. In making those assessments, thechannel auditorssandbodies consider internal control relevant of a well designed to probe each channel. the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an In on consideration of the risk and undertaking opinion the effectiveness of the entity’s internalassumed control. by the contractor under the EPT agreement, the contractor, shall market crude produced and saved fromused the EPT and is An audit also includes evaluating the appropriateness of accounting policies and the allowed to retain the gross proceeds for the recovery of 100% of all operating expenses reasonableness of accounting estimates made by management, as well as evaluating the overall incurredofinthe thefinancial EPT. Any amount of gross proceeds in excess of the cost of the EPT shall presentation statements. be subject to 60-40 sharing in favor of the government.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis duration of the EPT is a minimum of 90 days of actual crude flow from at least one well for ourThe audit opinion. excluding delays which arise from breakdowns, repairs or replacements, well conditions or other conditions. The EPT will be terminated upon the earliest of 182 days of actual crude

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

Accreditation No. 0012-FR-1 production or when sufficient data has been obtained or viability of theSEC Galoc Field has been established by the contractor in conjunction with the DOE.

INDEPENDENT AUDITORS’ REPORT On termination, the contractor shall either declare commerciality of the field and commit to undertake development, or declare field to be noncommercial for further development or production and commence abandonment and demobilization of the EPT facilities. The Stockholders and the Board of Directors Joint Operating Agreement (JOA) PetroEnergy Resources Corporation On September 12, 2006, the joint venture partners entered into a JOA, amending the 7th Floor, JMT Building existing JOA, for the purposes regulating the joint operations in the Galoc Block. The ADB Avenue, Ortigas Center, PasigofCity JOA shall continue for as long as: the provisions in SC No. 14 infinancial respectstatements of the Galoc remain in force; andCorporation, We 1) have audited the accompanying ofBlock PetroEnergy Resources 2) until all properties acquired or held for use in connection with the joint operations has the which comprise the statements of financial position as at December 31, 2009 and 2008, and been disposed of and final settlement has been made between the parties in statements of income, statements of comprehensive income, statements of changes in equity and accordance with their respective rightsyears and obligations in the Galoc Block; 31, 2009, and a statements of cash flows for each of the three in the period ended December summary of significant accounting policies and other explanatory notes. and without prejudice to the continuing obligations of any provisions of the JOA which are expressed toResponsibility or by their nature be required to apply after such final settlement. Management’s forwould the Financial Statements Block C Agreement Management is responsible for the preparation and fair presentation of these financial statements in In 2006, with Block C Agreement was Reporting entered into by the joint venture partners includes: (the Galoc accordance Philippine Financial Standards. This responsibility designing, Block Owners) of SC No. 14-C Galoc to specify gross proceeds allocation aspresentation well as the of implementing and maintaining internal control relevant to the preparation and fair rightsstatements and obligations relating to their respective ownershipwhether interestdue in the Galocor Block financial that are free from material misstatement, to fraud error;(the “ Galoc Contract Area Rights”) and their respective ownership interest in the Remaining selecting and applying appropriate accounting policies; and making accounting estimates that are Block (except for GPC). reasonable in the circumstances. The agreement also clarifies how GPC and Philodrill, which are the designated Operator of Auditors’ Responsibility the Galoc Block and the Remaining Block, respectively, shall work together to perform their andisexercise their as on Operator. Our obligations responsibility to express anrights opinion these financial statements based on our audits. We

conducted our audits in accordance with Philippine Standards on Auditing. Those standards require Allocation Contract Area Rightsand under 3 of the provides that The we comply withofethical requirements planSection and perform theBlock auditCtoAgreement obtain reasonable that: assurance whether the financial statements are free from material misstatement. 1) GPC shallperforming be entitled procedures to the Filipino Participation Incentiveabout Allowance, Production An audit involves to obtain audit evidence the amounts and disclosures Allowance, Recovery of Operating Expenses and the Net Proceeds of the SC No.including 14 in the financial statements. The procedures selected depend on the auditor’s judgment, insofar as it relates to the Galoc Block. the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to 2) Thepreparation portion of the Contract Area allocable as Filipino Participation the entity’s andGaloc fair presentation of Rights the financial statements in order to design audit Incentive Allowance, Production Allowance and Net Proceeds shall beofdistributed asan procedures that are appropriate in the circumstances, but not for the purpose expressing follows: opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the a) GPCof shall be allocated an amount to its participating in the Galoc reasonableness accounting estimates madeequal by management, as wellinterest as evaluating the overall Block which is currently 58.29075%. presentation of the financial statements. b) Nido and Philodrill shall be allocated an amount equal to 17.5% and 4.375%, We believe respectively. that the audit evidence we have obtained is sufficient and appropriate to provide a basis c) The balance of 19.83425% shall be allocated to the Remaining Block (except GPC) for our audit opinion. in accordance with number 5 below.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 3) The portion of the Galoc Contract Area Rights allocable to recovery of Operating Expenses (the reimbursement amount) shall be distributed as follows:

INDEPENDENT AUDITORS’ REPORT a) First, an amount equal to the operating expenses incurred by the Galoc Block Owners in respect of production costs on and from the date of the 2nd Galoc well being brought on stream shall be allocated to each Galoc Block Owner in accordance each Galoc Block Owner’s participating interest. The Stockholders and thewith Board of Directors b) Second, an amount equal PetroEnergy Resources Corporation to the Operating Expenses incurred by GPC and Nido in respect of the Galoc Block (excluding the $68 million historical cost assigned to the 7th Floor, JMT Building Galoc Block pursuant the FA) shall be allocated 77.721% to GPC and the ADB Avenue, Ortigas Center, PasigtoCity balance of 22.279% to Nido. c) Third, any reimbursement amount remaining after applying the provisions of 3a and 3b above shall be allocated 58.29075% to GPC, 17.5% to Nido, 4.375%Corporation, to Philodrill We have audited the accompanying financial statements of PetroEnergy Resources and 19.83425% to the Galoc Block Owners (except GPC but including Nido andthe which comprise the statements of financial position as at December 31, 2009 and 2008, and Philodrill only in relation to its remaining 4.779% interest and its 2.022% interest statements of income, statements of comprehensive income, statements of changes in equity in and Galoc Block, respectively) until all the Galoc Block Owners have received in and a statements ofthe cash flows for each of the three years in the period ended December 31, 2009, aggregateaccounting a total of $34 million in accordance with this provision. The 19.83425% summary of significant policies and other explanatory notes. allocated to the Galoc Block Owners (except GPC) shall be distributed by GPC in accordance with number below. Management’s Responsibility for the5 Financial Statements d) Fourth, any reimbursement amount remaining after applying the provisions of 3a, and 3c above be allocatedand 38.8605% to GPC and 17.5%financial to Nido statements and the Management3b is responsible forshall the preparation fair presentation of these in balance of 43.6395% to the Galoc Block Owners (except GPC but including Nido accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, relation to internal its remaining 4.779% interest the Galoc and Block) all the of implementingonly and in maintaining control relevant to the in preparation fairuntil presentation Galoc Block Owners have received in aggregate a total of $34 million in financial statements that are free from material misstatement, whether due to fraud or error; with this provision. 43.6395% allocated to the Galoc Block that are selecting andaccordance applying appropriate accountingThe policies; and making accounting estimates Owners (except GPC) shall be distributed by GPC in accordance with number 5 reasonable in the circumstances. below. Auditors’ Responsibility 4) After the provisions in Clause 3.3 of the Block C Agreement (as detailed in number 3 above) have satisfied, all the Owners shall share theonreimbursement Our responsibility is to been express an opinion onGaloc theseBlock financial statements based our audits. We amount in accordance with each Galoc Block Owner’s participating interest as follows: conducted our audits in accordance with Philippine Standards on Auditing. Those standards require

that we comply with ethical requirements and plan and perform the audit to obtain reasonable a)whether GPC, Nido and Philodrill shall receive 17.5% and 4.375%, assurance the financial statements are free58.29075%, from material misstatement. respectively; and b) The performing balance of 19.83425% be distributed by GPC to the Block An audit involves procedures shall to obtain audit evidence about the Galoc amounts andOwners disclosures (except Galoc but including Nido and Philodrill only in relation to remaining in the financial statements. The procedures selected depend on the auditor’s judgment, 4.779% including interest its of2.022% interest in the Galoc respectively) in accordance the assessment of theand risks material misstatement of theBlock, financial statements, whether due to with Clause 5 of the Block C Agreement (see number 5 below). fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit 5) All that amounts due to the in Galoc Block Owners (except 3.2,an procedures are appropriate the circumstances, but not GPC) for thepursuant purpose to of Clauses expressing 3.3c, 3.3d and 3.4 (see numbers 2, 3c, 3d and 4 above) (the “Outstanding Balance”), opinion on the effectiveness of the entity’s internal control. shallincludes be distributed by GPC accordance with instructions distribute the An audit also evaluating the in appropriateness of written accounting policies to used and the Outstanding Balance authorized by all the other Galoc Block Owners. reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. The Block C agreement shall terminate when SC No. 14 terminates.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 31 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Lifting Agreement In 2008, GPC and its partners entered into a lifting agreement which provides for the lifting procedures toAUDITORS’ be applied by GPC to ensure that: INDEPENDENT REPORT

1) each lifter is able to lift its Lifting Entitlement on a timely basis; 2) each lifter receives its Actual Lifting Proceeds; overlift andand underlift position of each party are monitored and settled; The3) Stockholders the Board of Directors 4) each lifter pays its Actual Lifting Deduction Payment to the GPC; and PetroEnergy Resources Corporation 5) GPC has sufficient funds in the Joint Account to pay the Government and the Filipino 7th Floor, JMT Building Group Entitlement. ADB Avenue, Ortigas Center, Pasig City The terms of the Block C Agreement shall prevail in the event of a conflict with terms of this We agreement. have audited the accompanying financial statements of PetroEnergy Resources Corporation,

which comprise the statements of financial position as at December 31, 2009 and 2008, and the The agreement shall terminateofwhen SC No. 14 terminates unless terminated earlier by theand statements of income, statements comprehensive income, statements of changes in equity unanimous written agreement bythe thethree parties. statements of cash flows for each of years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Decommissioning Agreement (DA) On December 12, 2008, GPC and partners entered into a decommissioning agreement Management’s Responsibility for theitsFinancial Statements which provides for the terms upon which the wells, offshore installations, offshore pipelines and the Floating Production Storage and Offloading (FPSO) facility used in connection with in Management is responsible for the preparation and fair presentation of these financial statements the joint operations in respect of the Galoc Development shall be decommissioned and accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, abandoned in accordance the control laws of relevant the Philippines including alland regulations issued of implementing and maintaining with internal to the preparation fair presentation pursuant to the Oil Exploration and Development Act of 1972. financial statements that are free from material misstatement, whether due to fraud or error;

selecting and applying appropriate accounting policies; and making accounting estimates that are In accordance with the DA, each party has a liability to fund a percentage of the reasonable in the circumstances. decommissioning costs (to be determined at a later date), which shall be equal to the party’sResponsibility percentage interest. The funding of the decommissioning costs shall commence on Auditors’ the date (“Funding Date”) GPC issues a written notice to the DOE after completion of the specifying date of an commencement of commercial operationsbased from on theour Galoc Our EPT, responsibility is the to express opinion on these financial statements audits. We Block. The decommissioning cost, as funded, shall be kept in escrow with a bank of conducted our audits in accordance with Philippine Standards on Auditing. Those standards require standing repute to be appointed GPC. the audit to obtain reasonable that international we comply with ethicaland requirements and plan andbyperform assurance whether the financial statements are free from material misstatement. The DA shall terminate when SC No. 14 terminates.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Assignment of Interest (AI) in the financial statements. The procedures selected depend on the auditor’s judgment, including On June 30, 2009, the Company, the approval DOE, proportionately assigned the assessment of the risks of materialwith misstatement of of thethe financial statements, whether due to its entire 1.034% participating interest in the Galoc Block to other joint venture partners. fraud or error. In making those risk assessments, the auditors consider internal control relevant to Under the agreement, relinquishes its rights over the Galoc Block in the entity’s preparation andthe fairCompany presentation of the financial statements in order to design audit consideration for the joint venture partners’ reimbursement of costs incurred by the procedures that are appropriate in the circumstances, but not for the purpose of expressing an Company to the the entity’s Galoc Block. a result of the assignment of interest, the opinion on thecorresponding effectiveness of internalAs control. Company received net proceeds of $782,215 from other joint venture partners. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall As of December 31, 2009 and 2008, the corresponding percentages of the Company’s presentation of the financial statements. participation in SC No. 14-C are as follows: We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis 2009 2008 for our audit opinion. NW Palawan - SC No. 14-C (West Linapacan) NW Palawan - SC No. 14-C (Galoc)

4.137% –

4.137% 1.034%

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 32 - 32 - 32 - - 32 Phone: (632) 891 0307 - 32 Fax: (632) 819 0872 profitability of petroleum operations andfull therecovery full recovery of www.sgv.com.ph unamortized of wells, The The profitability of petroleum operations and the of unamortized costscosts of wells, Theand profitability of facilities petroleum the fullfavorable recovery of unamortized costs of wells, The platforms profitability of petroleum operations andupon theand full recovery of outcome unamortized costs of wells, and other areoperations dependent upon the outcome of the Study platforms other facilities are dependent the favorable of the Study BOA/PRC Reg. No. 0001 platforms and other facilities are dependent upon thequantities favorable outcome of success the Study SEC Accreditation No. The profitability of petroleum operations and the full recovery ofquantities unamortized costs of0012-FR-1 wells, platforms and facilities dependent upon the favorable outcome of the Study Agreement, the discoveries of additional oil in commercial and the Agreement, theother discoveries ofare additional oil in commercial and the success of of Agreement, the discoveries of additional oilthe in commercial quantities the success of platforms and other facilities are dependent upon favorable outcome the Study future development thereof. Agreement, the discoveries of additional oil in commercial quantities and of theand success of future development thereof. future development thereof. Agreement, the discoveries of additional oil in commercial quantities and the success of future development thereof. INDEPENDENT AUDITORS’ REPORT future development thereof. Wind Energy Service Contract (WESC) Wind Energy Service Contract (WESC) Wind Energy Service (WESC) On September 14, 2009, the Company awarded byDepartment the Department of Energy two (2) Wind Energy Service Contract (WESC) On September 14, 2009, theContract Company was was awarded by the of Energy two (2) On September 14,areas 2009, Company was awarded by the Department of Energy Wind Energy Service Contract (WESC) On September 14, the Company was awarded byNo. the 2009-09-003) Department ofand Energy two (2)two (2) WESC covering the ofthe Sual, Pangasinan (WESC No. 2009-09-003) and Nabas, WESC covering the2009, areas of Sual, Pangasinan (WESC Nabas, WESC covering thethe areas ofPangasinan Sual, Pangasinan (WESC No. 2009-09-003) and Nabas, On September 14, 2009, was awarded by the 2009-09-003) Department ofand Energy two (2) Aklan WESC covering the areas of Sual, (WESC No. Nabas, Aklan The Stockholders and the Board ofCompany Directors Aklan WESC covering the areas of Sual, Pangasinan (WESC No. 2009-09-003) and Nabas, Aklan (WESC No. 2009-09-002). These service contracts were awarded pursuant to Republic (WESC Resources No. 2009-09-002). These service contracts were awarded pursuant to Republic PetroEnergy Corporation (WESC No. 2009-09-002). contracts were awarded pursuant to Republic Aklan (WESC No. 2009-09-002). These These serviceservice contracts were awarded pursuant to Republic Act Act 7th Floor, JMT Building Act (WESC No. 2009-09-002). These service contracts were awarded pursuant to Republic No. 9513, otherwise known as the “Renewable Energy Act of 2008”. Act No. 9513,Ortigas otherwise known as the ADB Avenue, Center, Pasig City“Renewable Energy Act of 2008”. No. otherwise 9513, otherwise the “Renewable of 2008”. Act No. 9513, knownknown as the as “Renewable EnergyEnergy Act of Act 2008”. No. 9513, otherwise known as the “Renewable Energy Act of 2008”. During the two-year pre-development stage of the contracts, the Company conduct During the two-year pre-development stage of the contracts, the Company shallshall conduct During the two-year pre-development stage of the contracts, the Company shall conduct During the two-year pre-development stage of the contracts, the Company shall conduct technical feasibility studies in the contract areas in order to confirm the wind power technical feasibility studies in the contract areas in order to confirm Resources wind power We have audited the accompanying financial statements of PetroEnergy Corporation, technical feasibility studies in the contract areas in order to confirm the wind power During the two-year pre-development stage of the contracts, the Company shall conduct technical feasibility studies the areas order to confirm the wind power potential the (2) twoareas. (2)ofin areas. The expected total expenditures for both in theinstatements two Thecontract expected total expenditures for 2009 both contracts whichpotential comprise the financial position asinat December 31, and contracts 2008,amounts andamounts the potential in the two (2) areas. The expected total expenditures for both contracts technical feasibility studies in the contract areas in order to confirm the wind power to about $420,000. potential in the two (2) areas. The expected total expenditures for both contracts amounts to about $420,000. statements of income, statements of comprehensive income, statements of changes in equityamounts and to cash about $420,000. potential in theflows two (2) total expenditures for both contracts to about $420,000. statements of for areas. each ofThe the expected three years in the period ended December 31, amounts 2009, and a to about $420,000. summary of significant accounting policies and other explanatory notes. 9. Deferred Oil Exploration Costs 9. Deferred Oil Exploration Costs 9. Deferred Oil Exploration 9. Deferred Oil Exploration Costs Management’s Responsibility for theCosts Financial Statements 9. The Deferred Oil Exploration Costs The movement in deferred oil exploration follow: movement in deferred oil exploration costscosts follow: The movement in deferred oil exploration costs follow: of these financial statements in The movement in deferred oil exploration costs follow: Management is responsible for the preparation and fair presentation 20092009 20082008 The movement in deferred oil exploration costs follow: accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, 2009 $4,499,993 Beginning balance $3,613,657 2009 $4,499,993 2008 of2008 Beginning balance $3,613,657 implementing and maintaining internal control relevant to the preparation and fair presentation 1,634,441 Internal development 2,689,895 $4,499,993 $3,613,657 1,634,441 Beginning balance Internal development 2,689,895 $4,499,993 Beginning balance 2009 2008 financial statements that are free from material misstatement, whether due to fraud or error;$3,613,657 (2,060,764) Reclassification to wells in progress (1,803,559) (2,060,764) 1,634,441 $3,613,657 Reclassification to wells in progress (Note(Note 8) 8) (1,803,559) Internal development 2,689,895 1,634,441 Internal development 2,689,895 balance selecting Beginning and applying appropriate accounting policies; and making$4,499,993 accounting estimates that are (2,060,764) Reclassification to wells in progress (Note 8) (1,803,559) $4,073,670 Ending balance $4,499,993 (2,060,764) $4,073,670 Reclassification to wells in progress (Note 8) (1,803,559) Ending balance $4,499,993 1,634,441 Internal development 2,689,895 reasonable in the circumstances. $4,073,670 $4,499,993 $4,499,993 $4,073,670 EndingEnding balancebalance (2,060,764) Reclassification to wells in progress (Note 8) (1,803,559) $4,073,670 Ending balance $4,499,993 Under the SCs entered into with the Department of Energy (DOE) covering certain Under the SCs entered into with the Department of Energy (DOE) covering certain

Auditors’ Responsibility Under the SCs entered into with the Department Energy (DOE) covering Under the SCs entered into with the Department ofinEnergy (DOE) covering certain petroleum contract areas in various locations theof Philippines, the participating oil petroleum contract areas in various locations in the Philippines, the participating oilcertain petroleum contract areas in various locations in the Philippines, thetheir participating oil Under the SCs entered into with the Department of Energy (DOE) covering certain companies (collectively known as Contractors) are obliged to provide, at their sole petroleum contract areas in various locations in the Philippines, the participating oil companies (collectively known as Contractors) are obliged to provide, at sole risk, the Our responsibility is to express an opinion on these financial statements based on our audits.risk, Wethe companies (collectively known asnecessary Contractors) areperformance obliged to provide, atobligations their sole risk, petroleum contract areas in various locations in the Philippines, the participating oil companies (collectively known as Contractors) are obliged to provide, at sole risk, the services, technology and financing in the of their underthe services, technology and financing necessary in the performance of their obligations under conducted our audits in accordance with Philippine Standards on Auditing. Those standards require services, technology andas financing necessary in the performance of their obligations under companies (collectively known Contractors) are obliged to provide, at their sole risk, the services, technology and financing necessary in the performance of their obligations under these contracts. The Contractors are also obliged to spend specified amounts indicated in these contracts. The Contractors are also obliged to spend specified amounts indicated in that we comply with ethical requirements and plan and perform the audit to obtain reasonable these contracts. The Contractors areobliged also obliged to spend specified amounts indicated in services, technology and financing necessary in the performance of their obligations under the contract in direct proportion to their work obligations. these contracts. The Contractors are also to spend specified amounts indicated in the contract in direct proportion to their work obligations. assurance whether the financial statements are free from material misstatement. the contract in proportion direct proportion towork their workto obligations. these contracts. The Contractors obliged spend specified amounts indicated in the contract in direct to are theiralso obligations. the involves contract in ifdirect proportion to their work However, the Contractors fail to obtain comply with their obligations, they pay to the However, if the Contractors fail to comply withobligations. theirevidence workwork obligations, shallshall pay the An audit performing procedures to audit about thethey amounts and to disclosures However, ifthe theamount Contractors failhave to comply with their work obligations, theyto shall pay to the government they should have spent but did not in direct proportion to their However, if the Contractors fail to comply with their work obligations, they shall pay the government the amount they should spent but did not in direct proportion their work in the financial statements. The procedures selected depend on the auditor’s judgment, includingwork government theparticipating amount they should have spent but did not in proportion direct proportion to their work However, if the Contractors fail to comply with their work obligations, they shall pay to the government the amount they should have spent but did not in direct to their work obligations. The companies have Operating Agreements among themselves obligations. The participating companies have Operating Agreements among themselves the assessment of the risks of material misstatement of the financial statements, whether due to obligations. The rights participating companies have Operating Agreements among themselves government the amount haveunder spent but did not in direct proportion to their workto which their and obligations under these contracts. obligations. The participating companies have Operating Agreements among themselves govern their rights and obligations these contracts. fraud which or error. Ingovern making thosethey riskshould assessments, the auditors consider internal control relevant which govern their and rights and obligations under contracts. these contracts. among themselves obligations. The participating companies have Operating Agreements which govern their rights obligations under these the entity’s preparation and fair presentation of the financial statements in order to design audit which govern rights and obligations underwith these contracts. The accumulated costs in connection the contracts are shown The accumulated costs incurred in connection the exploration contracts are shown procedures that aretheir appropriate inincurred the circumstances, butwith not for exploration the purpose of expressing an The “Deferred accumulated costs incurred in connection with the exploration contracts are shown under oil exploration costs” account in the statement of financial position. The The accumulated costs incurred in connection with the exploration contracts are shown under “Deferred oil exploration costs” account in the statement of financial position. The opinion on the effectiveness of the entity’s internal control. under “Deferred oil exploration costs” account inupon the statement of financial position. The The accumulated costs incurred in connection with the exploration contracts are shown under “Deferred oil exploration costs” account in the statement of financial position. The full recovery of these deferred costs is dependent the discovery of oil in commercial full recovery of these deferred costs is dependent upon the discovery oil in commercial An audit also includes evaluating the appropriateness of accounting policies used and the full recovery of these deferred costs is dependent upon the discovery ofcommercial oildevelopment in commercial under “Deferred oil exploration costs” account in the statement of financial position. The quantities from any of the petroleum concessions and the success of future full recovery of these deferred costs is dependent upon the discovery of oil in quantities from any of the petroleum concessions and the success of future development reasonableness of accounting estimates made by management, as well as evaluating the overall quantities from any of the petroleum concessions and the success ofindevelopment future development full recovery offinancial these costs is dependent uponthe the discovery of oil commercial quantities from any ofdeferred the petroleum concessions and success of future thereof. thereof. presentation of the statements. thereof. quantities from any of the petroleum concessions and the success of future development thereof. thereof. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , *SGVMC113435* , *SGVMC113435* , *SGVMC113435* , *SGVMC113435*, A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

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Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 SC 51 - East Visayas On August 5, 2005, a Farm-in Agreement was signed by the SC No. 51 members, including the AUDITORS’ Company, asREPORT Assignors with Australasian Energy Limited, a corporation INDEPENDENT existing under the laws of the Isle of Man and Ottoman Energy Limited, a company organized under the laws of Western Australia as Assignees. The Assignors assigned 80% of their participating interest to the Assignees in SC No. 51 in consideration for the obligationand including funding, at the Assignees’ sole cost of a seismic survey program. Thework Stockholders the Board of Directors The farminee submitted to the DOE a work program composed of drilling one well and PetroEnergy Resources Corporation acquisition of seismic data. 7th Floor, JMT Building

ADB Avenue, Ortigas Center, Pasig City In 2008, the 3D seismic data gathered the previous year were processed by the Singapore CGG-Veritas and were used to produce the prospect maps of two potential trapping thethe Argao and Cabilao.financial Technical surveys of over the drillingResources sites were Corporation, also We structures have audited accompanying statements PetroEnergy conducted during the year. which comprise the statements of financial position as at December 31, 2009 and 2008, and the

statements of income, statements of comprehensive income, statements of changes in equity and SC 6-A of - Octon-Malajon statements cash flows for Block each of the three years in the period ended December 31, 2009, and a In March 2007, Vitolaccounting GPC Investments S.A.other (VGI)explanatory negotiated anotes. farm-in to the SC No. 6-A in summary of significant policies and offshore Palawan. Under the agreement, Vitol will conduct a study on the prospectivity of the block over a one-year period untilFinancial March 2008, after which it will decide whether to Management’s Responsibility for the Statements continue or complete the farm-in process. Management is responsible for the preparation and fair presentation of these financial statements in As of December 31, 2009 and 2008, the corresponding of theincludes: Company’s accordance with Philippine Financial Reporting Standards. percentages This responsibility designing, participation in the various SC areas are as follows: implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; NW Palawan - SC No. 6-A 16.670% selecting and applying appropriate accounting policies; and making accounting estimates that are East Visayas - SC No. 51 4.012% reasonable in the circumstances. Gabonese Oil Concessions 2.525% Offshore Mindoro - SC No. 47

Auditors’ Responsibility

2.000%

Our responsibilityProperty is to express 10. Investment - net an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that As weof comply with ethical requirements andaccount plan andconsists performofthe audit obtain reasonable December 31, 2009 and 2008, this land withtocarrying value of assurance whether the financial statements are free from material misstatement. $31,417. An audit involves procedures to obtain audit evidence the amounts disclosures The fair value performing of the Company’s investment property has beenabout determined on theand basis of in the financial statements. The procedures selected depend on the auditor’s judgment, including recent sales of similar properties in the same areas as the investment property and taking the assessment risks of material misstatement thetime financial statements, into account of thethe economic conditions prevailing atofthe the valuation was whether made. due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s fair presentation to design The fairpreparation value of theand investment property of of the the financial Companystatements amountedintoorder $43,758 and audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an $31,468 as of December 31, 2009 and 2008, respectively. opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 34 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 11. Investment in and Advances to Navy Road Development Corporation (NRDC)

This account consists of:REPORT INDEPENDENT AUDITORS’ Investment in NRDC Acquisition cost Advances

$260,388 54,032 314,420 314,420 $–

The Stockholders and the Board of Directors PetroEnergy Corporation LessResources accumulated impairment loss 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City

Investment in NRDC represents the Company’s holdings in 100% of NRDC’s capital stock. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, As of December 31, 2009, 2008 and 2007 NRDC has not commenced commercial which comprise the statements of financial position as at December 31, 2009 and 2008, and the operations. The management of the Company intends to liquidate NRDC and has statements of income, statements of comprehensive income, statements of changes in equity and provided for full impairment losses on its investment in NRDC. Under these statements of cash flows for each of the three years in the period ended December 31, 2009, and a circumstances, NRDC’s accounts were no longer consolidated into the Company for 2009, summary of significant accounting policies and other explanatory notes. 2008 and 2007. Management’s Responsibility for the Financial Statements 12. Accounts Payable and Accrued Expenses Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, This account consists of: implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; 2009 2008 selecting and applying appropriate accounting policies; and making accounting estimates that are $179,184 Dividend payable (Note 14) $155,820 reasonable in theexpenses circumstances. 143,361 Accrued 217,613 59,101 59,101 27,406 – 17,682 Others 7,548 Our responsibility is to express an opinion on these financial statements based on our$440,082 audits. We $426,734 Due to NRDC

Auditors’Accounts Responsibility payable

conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements andaccrued plan and perform the to obtain The Company’s accounts payable and expenses are audit due within onereasonable year. assurance whether the financial statements are free from material misstatement. Carrying values approximate their fair values as of December 31, 2009 and 2008. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in13. theAsset financial statements. The procedures selected depend on the auditor’s judgment, including Retirement Obligation the assessment of the risks of material misstatement of the financial statements, whether due to fraud The or error. In making those risk assessments, auditors consider control to Company has recognized its share in thethe abandonment costs internal associated withrelevant the the entity’s preparation and fair presentation of the financial statements in order to design audit Etame and Avouma oilfields located in Gabon, West Africa. procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Movements in this account follows: An audit also includes evaluating the appropriateness of accounting policies 2009 used and the2008 reasonableness of accounting estimates made by management, as well as evaluating the overall $181,061 Beginning balance $92,948 presentation of the financial statements. 51,046 Additions during the year (Note 8) 47,836 Accretion expense

67,860

40,277

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis $299,967 Ending balance $181,061 for our audit opinion. The provision for the oilfields in Etame maintained the original discount rate.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 35 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 Additions during the year resulted from the change in the estimate of abandonment cost due to the addition of the estimates for the Avouma and Ebouri oilfield. The estimate was done by the operator of the oilfields in Gabon, West Africa. This was included as additions INDEPENDENT AUDITORS’ REPORT to “Wells, platforms and other facilities” account (see Note 8).

The provisions for the abandonment costs for Etame, Avouma and Ebouri oilfields are to beand settled in years and 2022, respectively. Theexpected Stockholders the Board of 2020 Directors PetroEnergy Resources Corporation 7th Floor, JMT Building 14. Equity ADB Avenue, Ortigas Center, Pasig City

Under the existing laws of the Republic of the Philippines, at least 60% of the Company’s capitalthe stock should be owned by citizens of the forResources the Company to own We issued have audited accompanying financial statements of Philippines PetroEnergy Corporation, and hold any mining or petroleum contract area. As of December 31, 2009, the total which comprise the statements of financial position as at December 31, 2009 and 2008, and the issued and subscribed capital stock of the Company is 99.77% Filipino 0.23%innonstatements of income, statements of comprehensive income, statements ofand changes equity and Filipino, as compared to 99.53% Filipino and 0.47% non-Filipino during 2008 and 99.64% statements of cash flows for each of the three years in the period ended December 31, 2009, and a Filipino 0.36% accounting non-Filipinopolicies during 2007. summary ofand significant and other explanatory notes. The BOD declared cash dividends follows: Statements Management’s Responsibility for theas Financial 2009 of these 2008 2007 Management is responsible for the preparation and fair presentation financial statements in July 22, 2009, 20% or $0.004 per share cash accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, dividends to all stockholders of record as of implementing and maintaining internal control relevant to the preparation and fair presentation of August 5, 2009 amounting to $569,398. The financial statements thatpaid are on free from 31, material whether due to $– fraud or error;$– $569,398 dividends were August 2009. misstatement, selecting and applying appropriate accounting policies; and making accounting estimates that are July 24, 2008, 30% or $0.006 per share cash reasonabledividends in the circumstances. to all stockholders of record as of August 11, 2008 amounting to $930,531. The

were paid on August 29, 2008. Auditors’ dividends Responsibility

– 930,531 – February 6, 2008, 20% or $0.004 cash dividends to all stockholders of record as of on these financial statements based on our audits. We Our responsibility is to express an opinion February 22, 2008 amounting to $678,454. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require – The dividends were paid on March 17, 2008. that we comply with ethical requirements and plan and perform the audit 678,454 to obtain reasonable– July 25, 2007, 20% or $0.005 per share cash assurancedividends whether to the statements free from material misstatement. allfinancial stockholders of recordare as of August 10, 2007 amounting to $607,829. The An audit involves performing procedures and disclosures dividends were paid on Septemberto5,obtain 2007. audit evidence–about the amounts – 607,829 in the financial procedures selected Januarystatements. 29, 2007, 20%The or $0.004 per share cash depend on the auditor’s judgment, including the assessment of the of material misstatement of the financial statements, whether due to dividends to allrisks stockholders of record as of February 21, 2007 amounting to $558,489. the auditors consider internal control relevant to fraud or error. In making those risk assessments, – dividends were paidpresentation on March 16,of 2007. 558,489 the entity’sThe preparation and fair the financial statements in order– to design audit $1,608,985 $1,166,318 procedures that are appropriate in the circumstances, but$569,398 not for the purpose of expressing an

opinion on the effectiveness of the entity’s internal control. Appropriated Retained Earnings An audit also includes evaluating the appropriateness of accounting policies used and the On July 24, 2008, the BODestimates approvedmade additional appropriationas of well retained earnings the overall reasonableness of accounting by management, as evaluating amounting for the development of the Ebouri oil field in Gabon, West Africa. presentation of to the$1,000,000 financial statements.

January 15, audit 2008,evidence the BOD we approved the appropriation of and $492,005 for theto provide a basis We On believe that the have obtained is sufficient appropriate development of the Ebouri oil field in Gabon, in addition to the $563,550 originally for our audit opinion. appropriated amount.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 36 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No.and 0012-FR-1 Total appropriations for the development of Ebouri oilfield as of December 31, 2009 2008 amounted to $2,055,555.

INDEPENDENT AUDITORS’ REPORT Capital Management The primary objective of the Company’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholders’ value. The Stockholders and the Board of Directors

PetroEnergy Resources Corporation The Company manages its capital structure and makes adjustments to it, in light of 7th Floor, JMT Building changes in economic conditions. ADB Avenue, Ortigas Center, Pasig CityTo maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders or issue new shares. The audited Company capital financial using a debt-to-equity which is Resources total debt divided by We have themonitors accompanying statements ofratio, PetroEnergy Corporation, total equity. which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and The Company’s source of capital statements of cash flows for each of thefollows: three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. Capital stock Management’s Responsibility for the Financial Statements Additional paid-in capital

2009 $3,358,068 13,390,875 $16,748,943

2008 $3,358,068 13,390,875 $16,748,943

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, The table below demonstrates the debt-to-equity ratios of the Company as of implementing and maintaining internal control relevant to the preparation and fair presentation of December 31, 2009 and 2008, respectively: financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are 2009 2008 reasonable in the circumstances.

Total debt: $426,734 Accounts payable and accrued expenses $440,082 Auditors’ Responsibility 299,967 Asset retirement obligation 181,061 85,771 Income tax payable − Our responsibility is totax express an opinion on these financial statements based − on our audits. Deferred liabilities 102,682We 45,409Those standards Accrued liabilitywith Philippine Standards on Auditing. 38,737 conducted our audits retirement in accordance require $857,881 $762,562 that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether Total equity:the financial statements are free from material misstatement. $3,358,068 Capital stock $3,358,068 13,390,875 Additional paid-in procedures capital An audit involves performing to obtain audit evidence about the amounts13,390,875 and disclosures Retained earnings in the financial statements. The procedures selected depend on the auditor’s judgment, including Appropriated 2,055,555 the assessment of the risks of material misstatement of the financial2,055,555 statements, whether due to 2,422,464 Unappropriated 1,269,083 fraud or error. In making those risk assessments, the auditors consider internal control relevant to $21,226,962 $20,073,581 the entity’s preparation and fair presentation of the financial statements in order to design audit 0.04:1 Debt-to-equity ratio 0.04:1

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the 15. RetirementofPlan reasonableness accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. The Company has a defined benefit retirement plan (the Plan) for all of its employees. The Plan provides normal and early retirement, as, death disabilitytobenefits. We believe that the for audit evidence we have obtainedasiswell sufficient and and appropriate provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 37 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No.for 0012-FR-1 The retirement expense included under general and administrative expense account the years ended December 31, 2009, 2008 and 2007 are as follows:

INDEPENDENT AUDITORS’ REPORT Current service cost Interest cost Expected return on plan assets The Stockholders the Board Recognizedand actuarial gains of Directors PetroEnergy Resources Corporation Retirement expense (Note 18)

2009 $15,730 5,520 (5,146) (2,372) $13,732

2008 $13,391 10,126 (2,321) − $21,196

2007 $15,265 5,172 (1,427) − $19,010

7th Floor, JMT Building ADBThe Avenue, Ortigas Center, Pasigrecognized City accrued retirement liability in the statements of financial position as of December 31, 2009 and 2008 are as follows:

We have audited the accompanying financial statements of PetroEnergy Resources Corporation, 2009 2008 which comprise the statements of financial position as at December$47,571 31, 2009 and 2008, and the Present value of accrued retirement liability $64,604 statements income, of comprehensive income, statements of changes in(73,704) equity and (41,918) Fair of value of planstatements assets statements of cash retirement flows for each of the three years in the period ended December 31, (9,100) 2009, and a 5,653 Net accrued liability summary of significant accounting 49,034 Unrecognized actuarial gains policies and other explanatory notes. 53,393 Foreign currency translation adjustments

Liability recognized in the statements of financial Management’s Responsibility for the Financial Statements position (Note 3)

(9,278)

$45,409

(5,556)

$38,737

Management is responsible for the preparation and fair presentation of these financial statements in The movements in the accrued recognized in the statements of financial accordance with Philippine Financialretirement Reportingliability Standards. This responsibility includes: designing, position are asmaintaining follows: implementing and internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; 2009 selecting and applying appropriate accounting policies; and making accounting estimates2008 that are $38,737 Liability recognized at beginning of year $42,216 reasonable in the circumstances. Retirement expense (Note 18) Contributions to retirement plan Auditors’ Responsibility Foreign currency translation adjustments Liability recognized at end of year

13,732 − (7,060) $45,409

21,196 (17,822) (6,853) $38,737

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require reconciliation of therequirements present valueand of accrued liability as follows: that The we comply with ethical plan andretirement perform the auditare to obtain reasonable assurance whether the financial statements are free from material misstatement.

2009 2008 Present value of accrued retirement liability An audit involves performing procedures to obtain audit evidence about the amounts and disclosures $64,604 at beginning of year $109,097 in the financial statements. The procedures selected depend on the auditor’s including 5,520 judgment, Interest cost 10,126 the assessment of the risks of material misstatement of the financial statements, whether due to 15,730 Current service cost 13,391 fraud orBenefits error. In making those risk assessments, the auditors consider internal control relevant to (36,549) paid − the entity’s preparation and fair presentation of the financial statements in order to design audit 522 Actuarial loss (gain) on obligation (59,532) procedures thatcurrency are appropriate the circumstances, but not for the purpose an (2,256) of expressing Foreign translationinadjustments (8,478) value of accrued liability opinion Present on the effectiveness of retirement the entity’s internal control. at includes end of year An audit also evaluating the appropriateness of accounting$47,571 policies used and$64,604 the

reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 38 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

The reconciliation of the fair value of the plan assets are as follows: SEC Accreditation No. 0012-FR-1 INDEPENDENT AUDITORS’ REPORT

Fair value of plan assets at beginning of year Actual contributions Expected return on plan assets Benefits paid The Stockholders and on theplan Board of Directors Actuarial loss assets PetroEnergy Resources Foreign currencyCorporation translation adjustments 7th Floor,Fair JMT Building value of plan assets at end of year ADB Avenue, Center, Pasig City ActualOrtigas return on plan assets

2009 $73,704 − 5,146 (36,549) (1,465) 1,082 $41,918 $3,796

2008 $61,292 17,822 2,321 − (550) (7,181) $73,704 $5,410

The distribution of net plan assets are as follows: We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 2009 and 2008, and the 2008 statements of income, of comprehensive income, statements of changes in $45,623 equity and $33,936 Investments in statements debt securities statements of cash flows for each of the three years in the period ended7,804 December 31, 2009, Cash and cash equivalents 27,789and a receivable 399 summaryInterest of significant accounting policies and other explanatory notes. 346 Trust fee payable

Management’s Responsibility for the Financial Statements

(168) $41,918

(107) $73,704

The principal actuarial assumptions used in determining pension obligation for the in Management is responsible for the preparation and fair presentation ofbenefit these financial statements Company’s plan are as follows: Reporting Standards. This responsibility includes: designing, accordance with Philippine Financial implementing and maintaining internal control relevant to the preparation and fair presentation of 2009 2008 financial statements that are free from material misstatement, whether due to fraud or error; of increase in salaries accounting policies; and making accounting estimates that are selecting Rate and applying appropriate 3.00% 3.00% reasonable inBeginning the circumstances.

3.00% Ending 3.00% Discount rate Auditors’ Responsibility 7.33% Beginning 10.00% 9.75% Ending 7.33% Our responsibility to of express Expected is rate return an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. 7.00%Those standards Beginning 4.08%require that we comply with ethical requirements and plan and perform the audit to obtain reasonable 7.00% Ending 7.00%

assurance whether the financial statements are free from material misstatement. The overall expected rate of return on assets is determined based on the market An audit involves performing procedures obtain audit evidence the amounts and disclosures expectations prevailing on that date,toapplicable to the periodabout over which the obligation is to in thebe financial settled.statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud Amounts or error. for In making those riskprevious assessments, consider internal control relevant to the current and periodsthe areauditors as follows: the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an 2009 2008 2007 opinion on the effectiveness of the entity’s internal control. 2,513 Experience adjustments on plan obligations (11,209) 16,058 (1,510) Experience adjustments onthe plan assets An audit also includes evaluating appropriateness of accounting policies515 used and the8,985 reasonableness of accounting estimates made by management, as well as evaluating the overall The Company expects statements. to contribute to the fund the amount of $17,627 in 2010. presentation of the financial We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 39 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

16. Income Tax

The provisionAUDITORS’ for income tax for the years ended December 31, 2009, 2008 and 2007 INDEPENDENT REPORT consists of: Current The Stockholders and the Board of Directors Deferred: PetroEnergy Resources Corporation On temporary differences 7th Floor, JMT Buildingin tax rates On changes

ADB Avenue, Ortigas Center, Pasig City

2009 $785,331

2008 $1,332,950

2007 $830,314

(192,630) – $592,701

(86,813) (28,766) $1,217,371

(61,278) – $769,036

The components of the Company’s net deferred tax liabilities (assets) follow: We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31,2009 2009 and 2008, 2008 and the statements of income, statements of comprehensive income, statements of changes in equity and Deferred tax liabilities (assets) on: statements Production of cash flows for each of the three years in the period ended December 31, 2009, and a $38,651 revenue $92,619 summary ofUnrealized significantforeign accounting policies and other explanatory notes. (14,611) exchange gain (loss) 18,573

9,205 29,019 − 13,050 (88,300) Accretion expense (18,149) Provision for probable losses Management is responsible for the preparation and fair presentation(17,092) of these financial(16,935) statements in (15,218) Accrued retirement liability (15,495) accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, ($87,365) $102,682 of implementing and maintaining internal control relevant to the preparation and fair presentation Non-deductible depletion expense

Management’s Responsibility for the Financial Statements Donations

financial statements that are free from material misstatement, whether due to fraud or error; The reconciliation the statutory tax rate to the effective income tax rate shown in thethat are selecting and applying of appropriate accounting policies; and making accounting estimates statements of income follows: reasonable in the circumstances.

2009 2008 2007 30.0% Statutory tax rate 35.0% 35.0% Add (deduct) Our responsibility is reconciling to expressitems: an opinion on these financial statements based on our audits. We (1.3%) Interest income subjected to final tax (0.9%) (0.6%) conducted our audits in accordance with Philippine Standards on Auditing. Those standards require (0.2%) Donations − − that we comply with ethical requirements and plan and perform obtain reasonable (2.9%) the audit to Others 0.3% (7.3%) assurance whether financial are free from material misstatement. − Effect of the change in tax statements rates (0.6%) – 25.6% Effective income tax rate 33.8% 27.1%

Auditors’ Responsibility

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the statements. Thewhich procedures selected auditor’sCourt judgment, Asfinancial per Republic Act 9337, was declared asdepend valid byon thethe Supreme on including the assessment of the risks of material misstatement of the financial statements, whether due to October 18, 2005, the corporate income tax, as well as the allowable deduction for interest fraudexpense or error.will In be making those risk assessments, the auditors consider internal control relevant to reduced to 30% and 33%, respectively, effective January 1, 2009. the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 40 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

17. Oil Production Operating Expenses

The cost and expenses incurred INDEPENDENT AUDITORS’ REPORTrelated to oil production are as follows: Production, transportation and related expenses The Stockholders and the Board of Directors Storage and loading expenses PetroEnergy Resources Corporation Supplies and facilities 7th Floor,Others JMT Building

ADB Avenue, Ortigas Center, Pasig City

2009

2008

2007

$2,572,374 601,544 2,938 74,084 $3,250,940

$3,568,508 711,796 18,936 195,282 $4,494,522

$2,559,680 521,563 16,999 172,498 $3,270,740

We have audited the accompanying financial statements of PetroEnergy Resources Corporation, 18. General and Administrative Expenses which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and The Company’s general and administrative expenses are as follows: statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes.

2009 2008 2007 $476,920 Salaries and wages (Note 19) $426,804 $338,617 Management’s Responsibility 118,479 Transportation and travel for the Financial Statements 100,335 76,627 105,904 Professional and other fees 105,867 120,544 Management is responsible for the preparation and fair presentation of these financial statements 96,016 Donation and contribution 129,427 63,106 in accordance with Philippine Financial Reporting Standards.91,101 This responsibility includes: designing, − − Research cost 51,139 Taxesand andmaintaining licenses 46,540 52,393of implementing internal control relevant to the preparation and fair presentation 45,713 Training andthat seminar 2,341 financial statements are free from material misstatement, whether due12,208 to fraud or error; 37,682 Insurance 28,939 10,670 selecting and applying appropriate accounting policies; and making accounting estimates that are 21,879 Utilities 21,170 19,422 reasonable in the circumstances. Entertainment, amusement and recreation 19,358 (EAR) 23,402 35,481 Auditors’Gasoline, Responsibility 18,305 oil and lubricants 18,633 13,808 17,410 Business meetings 15,086 17,048 Our responsibility is to express an opinion on these financial statements based 17,041 Office supplies 10,288on our audits. 9,330We conducted our audits indues accordance with Philippine Standards on Auditing.17,444 Those standards require 16,223 Condominium 16,770 that we comply with ethical requirements and plan and perform obtain reasonable 15,976the audit to Communication 12,501 11,665 13,732 misstatement. Retirement (Notes 15 and 19)are free from material 21,196 19,010 assurance whether expense the financial statements 12,531 Repairs and maintenance 6,446 14,859 12,317 about the Advertisement 12,765 An audit involves performing procedures to obtain audit evidence amounts and19,382 disclosures 9,686 Stock transfer fees The procedures selected depend 13,374 10,871 in the financial statements. on the auditor’s judgment, including 7,880 Security and janitorial services 7,428 8,289 the assessment of the risks of material misstatement of the financial statements, whether due to 5,862 Dues and subscriptions 2,520 2,462 fraud or error. consider internal 28,178 OthersIn making those risk assessments, the auditors 17,706 control relevant 19,235 to the entity’s preparation and fair presentation of the financial statements in order to design audit $1,239,332 $1,050,079 $881,930

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Revenue Regulations No. 10-2002 defines expenses to be classified as EAR expenses An audit also includes evaluating the appropriateness of accounting policies used and the and sets a limit for the amount that is deductible for tax purposes. EAR expenses are reasonableness of accounting estimates made by management, as well as evaluating the overall limited to 0.5% of net sales for sellers of goods or properties or 1% of net revenue for presentation of the financial statements. sellers of services. For sellers of both goods or properties and services, an apportionment formula is used in determining the ceiling on such expenses. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 41 19. Related Party Transactions

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Parties are considered to be related if one party has the ability, directly or indirectly, to INDEPENDENT AUDITORS’ REPORT control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influences. Related parties may be individuals or entities. Thecorporate Stockholders and the Board of Directors PetroEnergy Resources Corporation The Company has a profit sharing plan for directors, officers, managers and employees as 7th Floor, JMT Building indicated in its by-laws. amount, ADB Avenue, Ortigas Center,The Pasig City the manner and occasion of distribution is at the discretion of the BOD, provided that profit share shall not exceed 5% of the audited income before income tax and bonus. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, The remuneration of the Company’s directors members of2009 key management are which comprise the statements of financial positionand as other at December 31, and 2008, and the as follows: statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a 2009 notes. 2008 2007 summary of significant accounting policies and other explanatory Salaries and wages and other short-term $180,210 benefits Management’s Responsibility for the Financial Statements 81,873 Directors’ fees 5,144 Retirement expense Management is responsible for the preparation and fair presentation $267,227

$152,870 $149,295 148,432 92,781 16,660 8,381 of these financial statements in $317,962 $250,457

accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; 20. Financial Instruments selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. The Company’s principal financial instruments include cash and cash equivalents, trading and investment securities (financial assets at FVPL) and receivables. The main purpose of Auditors’ Responsibility these financial instruments is to fund the Company’s working capital requirements.

Our responsibility is to express an opinion on these financial statements based on our audits. We Categories and Fair Values of Financial Instruments conducted our audits in accordance with Philippine Standards on Auditing. Those standards require The carrying amount of the Company’s financial assets and the financial liabilities approximate that we comply with ethical requirements and plan and perform audit to obtain reasonable their fair values. As of December 31, 2009 and 2008, the Company’s financial assurance whether the financial statements are free from material misstatement. instruments are as follows: An audit involves performing procedures to obtain audit evidence about the amounts and disclosures Carrying Values Fair Valuesincluding in the financial statements. The procedures selected depend on the auditor’s judgment, 2009 2009 2008 the assessment of the risks of material misstatement of the financial statements, whether 2008 due to Assets: fraud orFinancial error. In making those risk assessments, the auditors consider internal control relevant to $2,048,418 $2,048,418 Financial assets at FVPL $573,308 $573,308 the entity’s preparation and fair presentation of the financial statements in order to design audit Loans and receivables: procedures thatinare appropriate in the circumstances, for the purpose of expressing an 58,572 but not 58,572 Cash bank 158,714 158,714 opinion onShort-term the effectiveness of the entity’s internal control. 1,831,207 1,831,207 investments 1,189,895 1,189,895 An audit also includes evaluating the appropriateness of accounting policies used and the Accounts receivable: reasonableness of accounting by management, as evaluating1,270,625 the overall 1,500,395 1,500,395 Consortium operatorestimates made 1,270,625as well 8,588 8,588 2,074 2,074 presentationOthers of the financial statements. 64,527 64,527 Interest receivable 18,449 18,449 63,125 63,125 Restricted cash 63,125 63,125 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis $5,574,832 $5,574,832 $3,276,190 $3,276,190 for our audit opinion. (Forward) (Forward)

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 42 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

Carrying Values 2009 2008

Financial Liabilities: INDEPENDENT AUDITORS’ REPORT Other financial liabilities: Accounts payable and accrued expenses: $143,361 Accrued expenses Dividend The Stockholders and payable the Board of Directors 179,184 59,101 Due to NRDC PetroEnergy Resources Corporation 27,406 Accounts payable 7th Floor, JMT Building 17,682 Others ADB Avenue, Ortigas Center, Pasig City $426,734

$217,613 155,820 59,101 – 7,548 $440,082

BOA/PRC Reg. No. 0001 Fair Values SEC Accreditation No. 0012-FR-1

2009

2008

$143,361 179,184 59,101 27,406 17,682 $426,734

$217,613 155,820 59,101 – 7,548 $440,082

The audited methodsthe and assumptions financial used by statements the Company estimating Resources the fair value of We have accompanying of in PetroEnergy Corporation, financial instruments are: which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and Cash and cashflows equivalents tothree the short-term nature of the instrument, carrying statements of cash for each Due of the years in the period ended December 31, 2009, and a amounts approximate fair values as of the statement of summary of significant accounting policies and other explanatory notes. financial position date. Management’s Responsibility for the Financial Statements Equity securities Fair values are based on published quoted prices. Unquoted securities at costofless impairment. Management is responsible for theequity preparation andare faircarried presentation these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, Debt securities Fair values basedtoon marketand prices statement of implementing and maintaining internal controlare relevant thequoted preparation fair at presentation of financial position date. financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are Golf shares reasonable in the circumstances. Fair values are based on current market prices at statement of financial position date. Auditors’ Responsibility Receivables Due to the short-term nature of the instrument, carrying approximate fair values as of based the statement of Our responsibility is to express anamounts opinion on these financial statements on our audits. We financial position date. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable Accounts payable and Carrying amounts values. assurance whether the financial statements are free approximate from materialfair misstatement. accrued expenses An audit involves performing procedures to obtain audit evidence about the amounts and disclosures following table shows instruments at fair value as of in theThe financial statements. Thefinancial procedures selected recognized depend on the auditor’s judgment, including December 31, 2009 and December 31, 2008, analyzed between those whose fair value the assessment of the risks of material misstatement of the financial statements, whether due is to based on: fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit  quoted prices in active in markets for identical assets liabilities (Levelof1); procedures that are appropriate the circumstances, but notorfor the purpose expressing an  on those involving inputs other than quoted included in Level 1 that are observable opinion the effectiveness of the entity’s internalprices control. for the asset or liability, either directly or indirectly (Level 2);policies and used and the An audit also includes evaluating the appropriateness of accounting  those with inputs for the asset ormade liability are not based on observable market data reasonableness of accounting estimates by that management, as well as evaluating the overall (unobservable inputs) (Level 3). presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

43 --- 43 - 43 Level 1 Level 1 Level 1 Financial assets atFinancial FVPL assets at FVPL Financial assets at FVPL Financial assets debt at FVPL Marketable debt securities $1,997,817 Marketable securities $1,997,817 Marketable debt securities $1,997,817 Marketable debt Marketable securities 38,470 equitysecurities securities equity 38,470 Marketable equity securities INDEPENDENT AUDITORS’ REPORTin golf club 38,470 Marketable equity securities Investment in golf Investment club Investment in golf club Investment 12,131 sharesin golf club shares 12,131 shares 12,131 shares Total Total $2,048,418 Total $2,048,418 Total $2,048,418

- 43 Level Level 2 1 Level 2 Level 2 $1,997,817 $– $– $– 38,470 – – – – – 12,131 $2,048,418 $– $– $–

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph

Level Level 3 Level 3 2 Fair Value BOA/PRC No. 0001 Level 3 Reg.Fair Value Level 3 FairNo. Value SEC Accreditation 0012-FR-1 $– $– $1,997,817 $– $– $1,997,817 $– – – $1,997,817 38,470 – – 38,470 – – 38,470 12,131 – – 12,131 – 12,131 $– $– $2,048,418 $– $– $2,048,418 $– $2,048,418

Fair Value $1,997,817 38,470 12,131 $2,048,418

TheFinancial Stockholders the Board of Management Directorsand Policies Financial Risk Objectives and Policies Risk and Management Objectives Financial Resources Risk Management Objectives and Policies PetroEnergy Corporation Financial Risk Management Objectives and Policies The Company manages and its financial own portfolio of financial instruments in order to The Company manages and maintains its own portfolio of of financial instruments in order order to The Company manages and maintains its ownmaintains portfolio instruments in to 7th Floor, JMT Building The Company manages andcapital maintains its own portfolio of financial instruments in order to financial fund its own operations and capital expenditures. Inherent in using these fund its own operations and expenditures. Inherent in using these financial its own operations and capital expenditures. Inherent in using these financial ADBfund Avenue, Ortigas Center, Pasig City fund its own operations and capital expenditures. Inherent in using these instruments are theon following on and liquidity, market andfinancial credit. instruments are the following risks on liquidity,risks market and credit. instruments are the following risks liquidity, market credit. instruments are the following risks on liquidity, market and credit. Financial Risks Risks Financial Risks We Financial havemain audited theThe accompanying financial statements of PetroEnergy Resources Corporation, Financial Risks main financial risks arising fromfinancial the Company’s financial instruments The financial risks arising from the Company’s Company’s financial instruments are liquidity liquidity risk, are liquidity risk, The main financial risks arising from the instruments are risk, which comprise the statements of financial position as at December 31, 2009 and 2008, and The main financial risks arising from the Company’s financial instruments are liquidity risk,the market risk and credit risk. market risk and credit risk. market risk and credit risk. statements of income, statements of comprehensive income, statements of changes in equity and market risk and credit risk. statements of cash flows for each of a. Liquidity Liquidity Risk Riska. Liquidity Riskthe three years in the period ended December 31, 2009, and a a. summary of Company significant accounting and other explanatory notes. a. The Liquidity Risk monitors The Company its cash position andposition overall liquidity position in assessing its policies cashmonitors flow position andflow overall liquidity position in assessing assessing The Company monitors its cash flow position and overall liquidity in The Company monitors its cash flow position and overall liquidity position in assessing its exposure to liquidity risk. The Company maintains a level of cash and cash its exposure to liquidity risk. The Company maintains a level of cash and cash its exposure to liquidity risk. TheFinancial CompanyStatements maintains a level of cash and cash Management’s Responsibility for the its exposure to liquidity risk. The Company maintains a level of cashthe and cash equivalents deemed sufficient to finance operations and to mitigate the effects of equivalents deemed sufficient to finance operations and to mitigate effects of equivalents deemed sufficient to finance operations and to mitigate the effects of equivalents deemed sufficient to finance operations and to mitigate the effects of fluctuation in cash flows. fluctuation in cash flows. fluctuation in cash flows. Management is responsible for the preparation and fair presentation of these financial statements in fluctuation in cash flows. accordance with Philippine Financial Reporting Standards. This responsibility includes: To cover itslong-term short-term and long-term funding requirements, the designing, Company intends to To cover cover its its short-term short-term and long-term funding requirements, the Company intends to To and funding requirements, the Company intends to implementing and maintaining internal control relevant to the preparation and fair presentation To cover its short-term and long-term funding requirements, the Company intends tothe of profile of the use internally generated funds. The table below summarizes the maturity use internally generated funds. The table below summarizes the maturity profile of internallythat generated funds. The table below summarizes the maturity profile of the financialuse statements are free from material misstatement, whether due to fraud or error; use internally generated funds. The table below summarizes the maturity profile of the 31, 2009 and Company’s accounts payable and accrued expenses as December Company’s accounts payable and accrued expenses as of December December 31,of2009 2009 and Company’s accounts payable and accrued expenses as of 31, and selecting and applying appropriate accounting policies; and making accounting estimates that are Company’s accounts payable and accrued expenses as of December 31, 2009 and 2008, respectively, based on undiscounted cash flows: 2008, respectively, based on undiscounted cash flows: 2008, respectively, based on undiscounted cash flows: reasonable in the circumstances. 2008, respectively, based on undiscounted cash flows: 2009 2009 2009 More than More 2009 than More than More On demand 1 year On demand 1 than year Total On demand 1 year Total Our responsibility isexpenses to express an opinion on these financial statements based on our audits. We On$143,361 demand 1 year Total $143,361 $– Accrued expenses $– $143,361 Accrued $143,361 $– $143,361 Accrued expenses $143,361 $– $143,361 Accrued expenses 179,184 – Dividend with payable conducted our audits in accordance Philippine Standards on Auditing. Those require 179,184 – standards 179,184 Dividend payable 179,184 – 179,184 Dividend payable 179,184 – reasonable 179,184 Dividend payable 59,101 Due to NRDC and plan and perform 59,101 59,101– Due with to NRDC that we comply ethical requirements the audit to obtain 59,101 – 59,101 Due to NRDC 59,101 – 59,101 Due to NRDC 27,406 Accounts payableare free from material 27,406 27,406– Accounts payable assurance whether financial statements 27,406 misstatement.– 27,406 Accountsthe payable 27,406 – 27,406 Accounts 17,682 17,682 17,682– Others payable Others 17,682 – 17,682 Others 17,682 – 17,682 Others $426,734 $– $426,734 $– $426,734 An audit involves performing procedures to obtain audit evidence and$426,734 disclosures $426,734 about the amounts $– $426,734 $– $426,734

Auditors’ Responsibility

in the financial statements. The procedures selected depend on the auditor’s judgment, including 2008 2008 the assessment of the risks of material misstatement of the financial statements, 2008whether due to 2008 More than More than fraud or error. In making those risk assessments, the auditors consider More internal thancontrol relevant to More than On demand 1 year On demand 1 year Total the entity’s preparation and fair presentation of the financial statements in order to design audit On demand 1 year Total On$217,613 demand 1 year Total Accrued expenses $217,613 Accrued expenses $– $217,613 procedures Accrued that are expenses appropriate in the circumstances, but$217,613 not for the purpose of$–expressing an $– $217,613 Accrued $217,613 $– $217,613 155,820 Dividend expenses payable Dividend payable 155,820 – 155,820– Dividend payable of the entity’s internal control.155,820 – 155,820 opinion on the effectiveness Dividend payable Due to NRDC 155,820 – 155,820 59,101 Due to NRDC 59,101 59,101– Due to NRDC 59,101 policies used – and the 59,101 An audit also includes evaluating the appropriateness of accounting Due to NRDC 59,101 – 59,101 Others 7,548 Others 7,548 7,548– Others 7,548as well as evaluating – 7,548 reasonableness of accounting estimates made by management, the overall Others 7,548 – 7,548 $440,082 $– $440,082 $– $440,082 $440,082 $– $440,082 presentation of the financial statements. $440,082 $– $440,082

Total $143,361 179,184 59,101 27,406 17,682 $426,734

Total $217,613 155,820 59,101 7,548 $440,082

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* ,, *SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 44 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 b. Market Risk Market risk is the risk of loss on future earnings, on fair values or on future cash flows that may result from REPORT changes in market prices. The value of a financial instrument may INDEPENDENT AUDITORS’ change as a result of changes in equity prices, foreign currency exchanges rates, interest rates and other market changes.

Equity Price The Stockholders andRisk the Board of Directors The Company monitors the prices of its securities on a daily basis, as well as PetroEnergy Resources closely Corporation macroeconomic and entity-specific factors which could directly or indirectly affect the 7th Floor, JMT Building prices of these instruments. In case of an expected decline in its portfolio of equity ADB Avenue, Ortigas Center, Pasig City securities, the Company readily disposes or trades the securities for replacement with more viable and less riskier investments. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, Such investment securities are subject to price due to changes market of which comprise the statements of financial position as at risk December 31, 2009inand 2008,values and the instruments arising either from factors specific to individual instruments or their issuers, statements of income, statements of comprehensive income, statements of changes in equity and or of factors instruments traded statements cash affecting flows for all each of the three yearsininthe themarket. period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. The analysis below is performed for reasonably possible movements in the Philippine Stock Exchange (PSE)for index all other variables held constant, showing the impact Management’s Responsibility thewith Financial Statements on income before tax (due to changes in fair value of equity securities and golf shares whose fair values are in the statements of income). Management is responsible for recorded the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, 2009 implementing and maintaining internal control relevant to the preparation and fair presentation of % Increase Decrease financial statements that are free from material misstatement, whether due to fraud or error; ±10% $3,886 ($3,886) Equity securities selecting andGolf applying appropriate accounting policies; and±6% making accounting 330 estimates that (330)are club shares reasonable in the circumstances. $4,216 ($4,216) Auditors’ Responsibility

2008 % Increase Decrease Our responsibility to express an opinion on these financial statements based Equityissecurities ±13% $3,632 on our audits. ($3,632)We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require Golf club shares ±6% 424 (424) that we comply with ethical requirements and plan and perform the audit $4,056 to obtain reasonable ($4,056)

assurance whether the financial statements are free from material misstatement.

There is no other impact on the Company’s equity other than those already affecting An audit involves performing procedures to obtain audit evidence about the amounts and disclosures net income. in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment the risks of material misstatement of the financial statements, whether due to ForeignofExchange Risk fraud or error. In making those risk arises assessments, theand auditors consider internal control Exposure to currency risk from sales purchases in currencies other relevant than theto the entity’s preparation and fair presentation of the financial statements in order to design audit Company’s functional currency which is very minimal since the Company’s oil revenues procedures that are appropriate in the circumstances, but not for the purpose of expressing an and costs and expenses are denominated in U.S. Dollar. Currency risk is monitored opinion on the effectiveness of the entity’s internal control. and analyzed systematically and is managed by the Company. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made management, as well aspossible evaluating the overall The analysis below demonstrates the by sensitivity to a reasonably change in the presentation of the financial statements. Philippine Peso exchange rate which is the only source of the Company’s foreign exchange risk, with all other variables held constant, showing the impact on income We believe that the evidence obtained is sufficient and appropriate to provide before tax audit (due to changeswe in have fair value of currency sensitive to financial assets anda basis for our audit opinion. liabilities).

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 45 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

Increase/decrease INDEPENDENT AUDITORS’ REPORT in Php rate +2.70% –2.70%

The Stockholders and the Board of Directors PetroEnergy Resources Corporation Increase/ decrease in Php rate 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City +1.52% –1.52%

2009 Impact on income before tax $2,035 (2,035)

2008 Impact on income before tax $20,826 (20,826)

There is no impact on the Company’s equityofother than those already affecting We have audited theother accompanying financial statements PetroEnergy Resources Corporation, net income. which comprise the statements of financial position as at December 31, 2009 and 2008, and the statements of income, statements of comprehensive income, statements of changes in equity and Interest Rate Riskfor each of the three years in the period ended December 31, 2009, and a statements of cash flows The Company’s exposure to marketand riskother for changes in interest summary of significant accounting policies explanatory notes.rates relates primarily to the Company’s money market placements and debt securities. The table below demonstrates the sensitivity to aFinancial reasonably possible change in interest rates, with all Management’s Responsibility for the Statements other variables held constant, of the Company’s net income: Management is responsible for the preparation and fair presentation of these financial statements in 2009 includes: designing, accordance with Philippine Financial Reporting Standards. This responsibility Increase/decrease implementing and maintaining internal control relevant to the preparation and fair presentation of in interest rate Impact on income financial statements that are free from material misstatement, whether due to fraud or error; (in basis points) before tax selecting and applying appropriate accounting policies; and making accounting estimates that are +140 $39,156 reasonable in the circumstances. –140 (39,156) Auditors’ Responsibility

2008 Increase/decrease Our responsibility is to express an opinionin on theserate financial Impact statements based on our audits. We interest on income conducted our audits in accordance with(inPhilippine Standards on Auditing. Those standards require basis points) before tax that we comply with ethical requirements and plan+200 and perform the audit to obtain reasonable $34,541 –200 (34,541) assurance whether the financial statements are free from material misstatement.

is no other impact on the Company’s equity other than those An auditThere involves performing procedures to obtain audit evidence about the already amountsaffecting and disclosures net income. in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to c. orCredit fraud error. Risk In making those risk assessments, the auditors consider internal control relevant to There are significant concentrations risk within the Company since most ofaudit its the entity’s preparation and fair presentation of of credit the financial statements in order to design financial assets are fromin consortium operator, but although risk is immaterial. procedures that are appropriate the circumstances, not forcredit the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 46 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

SEC Accreditation No. 0012-FR-1 The table below shows the comparative summary of maximum credit risk exposure on financial instruments as of December 31, 2009 and 2008:

INDEPENDENT AUDITORS’ REPORT

2009 2008 Financial assets at FVPL: $1,997,817 Marketable debt securities $527,030 38,470 Marketable equity securities 31,127 The StockholdersGolf andclub theshares Board of Directors 12,131 15,151 PetroEnergy Loans Resources Corporation and receivables: 7th Floor, JMT Building 58,572 Cash in bank 158,714 1,831,207 Short-term investments 1,189,895 ADB Avenue, Ortigas Center, Pasig City Accounts receivable: 1,500,395 Consortium operator 1,270,625 8,588 Others 2,074 We have audited the accompanying financial statements of PetroEnergy Resources Corporation, 64,527 Interest receivable 18,449 which comprise the statements of financial position as at December 31, 2009 and 2008, and the 63,125 Restricted cash 63,125 statements of income, statements of comprehensive income, statements of changes$3,276,190 in equity and $5,632,894

statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies and other explanatory notes. The Company has a well-defined credit policy and established credit procedures. In addition, receivable balances are beingStatements monitored on a regular basis to ensure Management’s Responsibility for the Financial timely execution of necessary intervention efforts. Management is responsible for the preparation and fair presentation of these financial statements in Thewith Company determines credit quality by class for responsibility loan-related statement of accordance Philippine Financialthe Reporting Standards. This includes: designing, financial position lines based on the following: implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; in bank appropriate and short-term investments - based the nature of the estimates counterparties selecting Cash and applying accounting policies; and on making accounting that are and the reputation of the financial institution. reasonable in the circumstances. - based on the payment behavior of the counterparty. High grade pertains Auditors’Receivables Responsibility to receivables from consortium operator and interest receivable from short-term investments standard grade pertains other receivables. Both are past We Our responsibility is toand express an opinion on thesetofinancial statements based onneither our audits. due nor impaired. conducted our audits in accordance with Philippine Standards on Auditing. Those standards require

that we comply with ethical requirements and plan and perform the audit to obtain reasonable The table below shows statements the credit quality by from classmaterial of assetmisstatement. for loan-related statement of assurance whether the financial are free financial position lines, based on the Company’s credit rating system as of December 31, 2009procedures and 2008. to obtain audit evidence about the amounts and disclosures An audit involves performing in the financial statements. The procedures selected depend on the auditor’s judgment, including 2009 the assessment of the risks of material misstatement of the financial statements, whether due to Neither past due nor impaired Past due fraud or error. In making those risk assessments, the auditors consider internal control relevant to High grade Standard grade and impaired Total the entity’s preparation and fair presentation of the financial statements in order to design$58,572 audit $58,572 $– $– Cash in bank procedures that areinvestments appropriate in the circumstances, but not for the an 1,831,207 – purpose of expressing – 1,831,207 Short-term opinion on the effectiveness of the entity’s internal control. Accounts receivable: An audit also Consortium includes evaluating of accounting used and the 1,500,395 – policies 58,062 1,558,457 operator the appropriateness reasonableness of accounting estimates made by– management, as well as evaluating the overall 8,588 – 8,588 Others 64,527 – – 64,527 Interest receivable presentation of the financial statements. $3,454,701

$8,588

$58,062

$3,521,351

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 47 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

2008 SEC Accreditation No. 0012-FR-1 Neither past due nor impaired Past due High grade Standard grade and impaired Total INDEPENDENT AUDITORS’ REPORT $158,714 Cash in bank $– $– $158,714 Short-term investments 1,189,895 – – 1,189,895 Accounts receivable: Consortium operator 1,270,625 – 56,449 1,327,074 The Stockholders Others and the Board of Directors – 2,074 – 2,074 Interest receivable Corporation 18,449 – – 18,449 PetroEnergy Resources $2,637,683 $2,074 $56,449 $2,696,206 7th Floor, JMT Building

ADB Avenue, Ortigas Center, Pasig City As of December 31, 2009 and 2008, the Company has no past due receivables that are not impaired. We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise statements of financial position at December 31,receivables 2009 and 2008, Past duethe and impaired receivables relates toaslong outstanding from aand the statements of income, statements comprehensive statements of changes in equity and consortium member which of were provided fullyincome, with allowance. statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant policies andthe other explanatory notes. of the Company, which With respect to accounting credit risk arising from other financial assets compose of financial assets at FVPL, cash in bank and short-term investments, the Management’s Responsibility for therisk Financial Statements Company’s exposure to credit relates to default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal 21. Basic/Diluted Earnings Per Sharecontrol relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applyingofappropriate accounting policies; andfollows: making accounting estimates that are The computation the Company’s earnings per share reasonable in the circumstances. 2009 2008 2007 $1,722,779 $2,242,704 $2,068,805 136,912,110 Weighted average number of shares 136,912,110 136,912,110 $0.013 Basic/diluted per an share $0.015 We Our responsibility is earnings to express opinion on these financial statements $0.016 based on our audits.

Auditors’ NetResponsibility income

conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. 22. Subsequent Events An audit involvesRenewable performingEnergy procedures to obtain audit evidence about the amounts and disclosures Geothermal Service Contract (GRESC) in the financial statements. The procedures selected depend on the auditor’s judgment, On February 1, 2010, the Company signed GRESC No. 2010-02-012 covering the including the assessment of the risks of material misstatement of the financial statements, whether due to Maibarara Geothermal Field in Laguna and Batangas areas, following a Philippine Energy fraud or error. In making those risk assessments, the auditors consider internal control relevant to Contracting Round for Geothermal held by the DOE in November 2009, where the the entity’s preparation and fair presentation of the financial statements in order to design audit Company emerged as the lone qualified bidder. procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on this the effectiveness of the internal control.to perform the following during the Under service contract, theentity’s Company committed An audit also includes evaluating the appropriateness accounting policies used and the first contract year of the pre-development stage: (i)ofLocal Government Units and reasonableness of accounting estimates made by management, as well as evaluating the overall stakeholders coordination; (ii) Geologic and geophysical studies and resource assessment; presentation of the financial statements. (iii) land rights survey and lease; (iv) obtain Department of Environment and Natural Resources (DENR) and other permits (v) establish field office; (vi) land and water supply We preparations; believe that the audit we have is sufficient and appropriate provide a basis and (vii)evidence well work-over andobtained drilling preparations. The expected to minimum for our audit opinion. expenditures for the first contract year amounts to $560,000.

*SGVMC113435* , *SGVMC113435* , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

- 48 -

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001

No. 0012-FR-1 On the second contract year, the Company will perform (i) work-overSEC of Accreditation existing wells; (ii) flow-testing and bore output measurements; (iii) engineering and design of steam/brine lines; (iv) grid impact study; and (v) start site preparation and construction of the fluid INDEPENDENT AUDITORS’ REPORT collection and disposal system and power plant. The expected minimum expenditures is about $17,768,000.

*SGVMC113435* *SGVMC113435* , , A member firm of Ernst & Young Global Limited

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

INDEPENDENT AUDITORS’ REPORT

*SGVMC113435*,

A member firm of Ernst & Young Global Limited

Board of Directors

Rizalino S. Navarro Chairman

Milagros V. Reyes President

Cesar A. Buenaventura Director

Eric O. Recto Director

Helen Y. Dee Director

Walter W. Brown Director

Yvonne S. Yuchengco Director

S yC ip G orres Velayo & C o. 6760 Ayala Avenue 1226 Makati City Philippines

PetroEnergy Resources Corporation

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

INDEPENDENT AUDITORS’ REPORT

OFFICERS

President: Milagros V. Reyes

The Stockholders and the Board of Directors Vice President: Francisco G. Delfin, Jr. PetroEnergy Resources Corporation Treasurer: Yvonne S. Yuchengco 7th Floor, JMT Building ADB Avenue, Ortigas Center, Pasig City Corporate Secretary: Samuel V. Torres We have audited the accompanying financial statements of PetroEnergy Resources Corporation, which comprise the statements of financial position as at December 31, 2009 and 2008, and the Corporate Directory statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2009, and a summary of significant accounting policies Auditors SGV &and Co other explanatory notes.

6760 Ayala Ave, Makati City

Management’s Responsibility for the Financial Statements

Bankers for theRizal Commercial Banking Corporation Management is responsible preparation and fair presentation of these financial statements in Ortigas Malayan Plaza accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation Ground floor corner Opal Road and fair presentation of financial statements that are free from material misstatement, whether to fraud or error; ADB Avenue, Ortigas Business due Center selecting and applying appropriate Pasig accounting policies; and making accounting estimates that are City reasonable in the circumstances. United Coconut Planters Bank Ground Floor, Emerald Building Our responsibility is to express an opinion on these financial statements basedCenter on our audits. We F. Ortigas, Jr. Ave., Ortigas Business conducted our audits in accordancePasig with Philippine Standards on Auditing. Those standards require City Auditors’ Responsibility

that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

Transfer Agent

Rizal Commercial Banking Corporation Ground floor, audit Grepalife Building An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the judgment, including 221 Sen. Gil J. Puyat Avenue auditor’s Makati City the assessment of the risks of material misstatement of the financial statements, whether due to Telephone Nos. (632) 892.4156; 892.1461 fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit Executive PetroEnergy Resources procedures that are Office appropriate in the circumstances, but not for Corporation the purpose of expressing an Floor JMTcontrol. Corporate Building, ADB Ave. opinion on the effectiveness of the 7th entity’s internal An audit also includes evaluating the appropriateness accounting policies Ortigas BusinessofCenter, Pasig City used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Telephone Nos. (632) 637.2917; 637.5799; 637.4032; 637.4362 Fax 634.6066; 633.8584 We believe that the audit evidence (632) we have obtained is sufficient and appropriate to provide a basis petro_energy@petroenergy.com.ph for our audit opinion.Email URL http://www.petroenergy.com.ph

*SGVMC113435*,

A member firm of Ernst & Young Global Limited