2016 Half Year Results
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR).
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Urals Energy PCL (AIM: UEN), the independent exploration and production company with operations in Russia, is pleased to announce its half-year results for the six months ended 30 June 2016.
- Gross profit increased by 15% to US$2.3 million (H1-2015: US$2.0 million)
- Operating profit of US$0.6 million for the period (H1-2015: operating loss US$0.1 million)
- Net profit before income tax of US$3.3 million (H1-2015: US$0.3 million). Underlying net profit before income tax of US$0.3 million (H1-2015: loss of US$0.2 million). Largely caused by exchange rate movements during both periods
- EBITDA* increased to US$2.2 million from US$1.3 million for the first six months of 2015, an increase of 69%, with simultaneous growth in EBITDA margins to 30.1% from 18.3%
- US$6.0 million loan provided by Petraco Oil Company Limited repaid in full, including accrued interest, post the successful completion of the annual tanker shipment from Arcticneft
- New 18 month 300 million Russian Roubles (approximately US$4.6 million) revolving working capital credit facility with OJSC Sberbank of Russia
*Earnings before interest, taxation, depreciation and amortisation ("EBITDA") is a non IFRS measure which the Group uses to assess its performance.
Operational highlights for the year to date
- Total production during the period increased by 13% to 362,634 barrels (H1-2015: 321,587 barrels)
- Total daily production remained broadly flat, as expected, at 1,930 BOPD (average H1-2015: 2,004)
- Awarded the South Dagi development licence on Sakhalin Island in June 2016 following a State auction. The South Dagi licence has Russian State Registered reserves C1 plus C2, equivalent to 2P (proven and probable) approximately 17.7 million barrels
- Completed acquisition of Artic Oil Company Limited ("ANK"), in August, including production of 340bbls/day, 2P equivalent reserves of 16mmbbls and substantial future production economies for the Group
- Successful completion of the annual tanker shipment from Arcticneft of 28,441 tons of crude oil (an equivalent of 225,283 barrels)
- RK-Oil Limited and BVN Oil Limited successfully integrated into the Group's wider business and operations
Mr Shrager, Chairman commented: "The Company performed well in the first six months of the year, improving profitability and cash flow, which supports the Board's strategy.
On Kolguev Island, we have achieved a rapid integration of the recent acquisition of Artic Oil with AKN. This has led to increased daily production of 325 bbl/day and we expect a reduction in lifting costs as well. Through the acquisition, we now have a modern drilling rig and associated equipment sufficient for three years of operation, to add to our existing workover rig. We will now be able to make two rather than one shipment per year - the first in May and a second in September. This half year should therefore be the last in which our operations on the Island have accumulated large stock levels by the end of June, with the associated working capital requirements.
Over the last 12 months, taking advantage of our financial position, we have transformed the Company's reserve base through licence extensions and acquisitions of further licenses, from 50 million bbl 2P to approximately 100 million bbl 2P equivalent. The average cost of acquisitions have been approximately 9 cents US /bbl. We will commission a Competent Persons Report before the end of the year to update and confirm the numbers. We are preparing development plans for the new licenses for State Regulatory Approval, and anticipate that we will be able to increase overall production substantially. The pace of increase will depend on market conditions and thus our own cash generation, but in coming months we will investigate additional funding sources, aimed at potentially advancing the rate of production at individual operations. However, we remain cautious in the current environment."
Interim Chief Executive Officer's Statement
As stated previously, the Board had decided to defer the drilling of additional wells at Petrosakh until the completion of further geological investigation. During the first six months of 2016, the Company focused on minimising the natural decline in production and exploring new ways of increasing output.
In the South Dagi area the Company is now working on the preparation of the field development plan. At the same time the decision was taken to carry out a Passive Micro-Seismic survey over a selected area of the new oil field, aimed at detailed interpretation of hydrocarbons.
Petrosakh continues to refine and sell 100% of its crude oil production into a highly competitive local refined products market.
The six months ended 30 June 2016 was characterised by a 5% average increase in refined products prices in Russian Rouble equivalent and an increase in Excise Tax per ton totaling 79.5%. During the period, the downstream strategy of the Company concentrated mainly on a flexible pricing policy, which allowed for an increasing customer base followed in turn by increases in sales volume.
The Company also started to perform repair works on its terminal, in preparation for being able to export crude/refined product, or to develop bunkering activity, subject to ongoing oil price levels and the taxation policy of the Russian Government.
During the reporting period, the main efforts of the Company continued be a focus on minimising the natural decline in production through workovers. The acquisition of Arctic Oil has led to increased daily production of 325 bbl/day. After preliminary analysis of the well stock the Company will concentrate on re-entering several wells on the new field with further workovers.
RK-Oil and BVN-Oil
During the reporting period the Company was working on the preparation and approval of development plans for both fields. These plans are expected to be approved by the State authorities by the end of 2016.
At the same time, subject to the ongoing economic situation, the Company is preparing a programme for the drilling of one exploration well on the RK-Oil licence area, with drilling to potentially commence by the end of 2016.
Post period end acquisition activity
In August 2016, the Company purchased the entire share capital of Arctic Oil Company Limited ("ANK") from AO ArcticMorNefteGazRazvedka ("AMNGR"). This acquisition was made by Urals Energy's subsidiary, AO Arcticneft.
ANK's sole asset is the central part of the Peschanoozerskoe oil field on Kolguyev Island. The eastern and western parts of the Peschanoozerskoe field are already owned by Arcticneft. ANK produces 340 bbls/day and has recoverable reserves registered with the Russian State Authorities of 16 million barrels of C1 plus C2, equivalent to 2P.
The ANK acquisition's cash consideration of Russian Rouble 100 million was financed by a short-term loan from Kamchatcomagroprombank ("KKAPB"), a bank in which Mr Shvets, the owner of Adler SA, the Company's largest shareholder, is a board member and shareholder (with 15.4% of the issued share capital of KKAPB).
The six months ended 30 June 2016 was characterised by continuing high volatility in the crude oil market price at an average level of US$43 per barrel (H1-2015: average US$58 per barrel) as well as high volatility in the Russian foreign exchange market. Domestic prices for oil products ranged from US$27 to US$80 per barrel (H1-2015: US$82 to US$106 per barrel).
There were no deliveries of crude oil exported from Arcticneft during the reporting period, resulting in 204,850 barrels of commercial crude oil remaining in stock as at 30 June 2016. The tanker shipment from Arcticneft was successfully completed post the period end at the beginning of August 2016.
|Gross revenues before Excise and export duties||8,858||7,715|
|Net revenues after Excise, export duties and VAT||7,525||7,214|
|Normalised management EBITDA||2,226||1,323|
|Total net finance (expense)/benefits||3,214||282|
|(Loss) / profit for the year||3,946||(48)|
|Petrosakh BOPD (average)||1,319||1,088|
|Arcticneft BOPD (average)||673||689|
Summary table: Gross Revenues before excise and export duties ($'000)
|Domestic sales (Russian Federation)||802||1,337|
|Petroleum (refined) products - domestic sales||7,955||6,257|
|Total gross revenues before Excise and export duties||8,858||7,715|
For the six months ended 30 June 2016, total gross revenues increased by US$1.1 million as a result of an increase in sales volumes to 176,306 barrels for the six months ended 30 June 2016 (H1-2015: 133,034 barrels) and a 5% average increase in refined products prices in Russian Rouble equivalent. These positive factors were partly offset by an 18% average devaluation of the Russian Rouble versus the US Dollar. The lower sales volume for the six months ended 30 June 2015 was due to the fire that occurred at the Petrosakh refinery at the beginning of last year.
High volatility in foreign exchange rates during the reporting period and changes in Excise Tax regulations led to a decrease in average net back prices for domestic sales of crude oil and petroleum (refined) products. A 16% decrease in net back prices for crude oil domestic sales is broadly in line with the 18% average devaluation of the Russian Rouble versus the US Dollar. During the first half of 2016, there was a substantial increase in the Excise Tax for EURO - IV gasoline, which, by the end of the second quarter represented a total increase of 79.5%. This was combined with increases in the cost of a newer additive, which in total, led to 21.5% fall in net back prices for domestic sales of petroleum (refined) products. The net back for domestic product sales is defined as gross product sales minus VAT, transportation costs, Excise Tax and refining costs.
Summary table: Net backs (US$/bbl)
|Domestic sales (Russian Federation)||38.95||46.43|
|Petroleum (refined) products - domestic sales||38.65||49.25|
Gross profit (net revenues less cost of sales) for the first half of 2016 increased 15% to US$2.3 million (H1-2015: US$2.0 million). The main driver of this increase was the growth of sales volumes.
Cost of sales for the six months ended 30 June 2016 totaled US$5.2 million as compared with US$5.3 million for the six months ended 30 June 2015, of which US$2.5 million and US$2.1 million respectively represented non-cash items, principally depreciation, amortisation and depletion. The stable operating cost was mainly due to devaluation of the Russian Rouble versus the US Dollar. At the same time the Company increase its operating costs in Russian Rouble equivalent by 21% compared with that achieved for the six months ended 30 June 2015. The increase of operating cost in Russian Rouble equivalent is a combination of:
- A 18% decrease in unified production tax, which depends on foreign exchange rates and the market price for crude oil
- A 17% increase in wages and salaries in production entities (broadly representing inflation for one and a half years)
- A 55% increase in the cost of materials. This increase was caused by inflation and also the cost of a newer additive, which is required in order to be in line with the EURO 5 requirement that the Company implemented during the reporting period
Selling, general and administrative expenses decreased during the first half of 2016 by US$0.3 million to US$1.6 million (H1-2015: US$1.9 million). Apart from Russian Rouble depreciation, the Company had an average increase of 8% in Russian Rouble denominated sales, general and administrative costs in the reporting period, as compared with the previous period. The main driver of this increase was growth in storage and transportation expenses related to small-scale wholesale activities at Petrosakh, and the general and administrative expenses of the two acquired companies BVN-Oil and RK-Oil.
The net finance income for the first half of 2016 was US$3.6 million (H1-2015: US$0.2 million). Net finance income for the period primarily consisted of exchange rate movements caused by a strengthening of the Russian Rouble versus the US Dollar in the first half of 2016.
The increase in sales volumes in the six months ended 30 June 2016 resulted in a consolidated increase in normalised management EBITDA of US$0.9 million to US$2.3 million for the first half of 2016, compared with US$1.3 million in the first half of 2015, with EBITDA margins of 30.1% and 18.3% respectively.
Management EBITDA (US$'000) - Unaudited
|(Loss) for the year||3,411||(48)|
|Income tax (charge)||498||273|
|Net interest and foreign currency (gain)/loss||(3,317)||(282)|
|Depreciation, depletion and amortisation||1,540||1,232|
|Total non-cash expenses||(1,279)||1,223|
|Charge of bad debt provision||-||-|
|Other non-recurrent (income)/losses||134||148|
|Total non-recurrent and non-cash items||-||148|
Net debt Position and Borrowings
As at 30 June 2016, the Company had net debt of US$9.6 million (calculated as long-term and short-term debt less cash in bank and less loans issued). As at 31 December 2015, the Company had net debt of US$2.2 million.
In May 2016, the Company entered into a short-term loan agreement with Petraco, under which Petraco agreed to advance the sum of US$6.0 million to the Company. The loan, including the accrued interest, was fully repaid in September 2016 as a result of the non-cash settlement transactions involving trade receivables from crude oil sales to Petraco.
As at 30 June 2016, the total borrowing of the Company was US$12.7 million (31 December 2015: US$3.9 million), including a US$4.7 million 18 month revolving credit facility from the Sakhalin branch of OJSC Sberbank of Russia (31 December 2015: US$2.2 million), US$1.8 million of debt which was acquired with two private Russian companies, RK-Oil and BVN-Oil (31 December 2015: US$1.7 million) and the US$6.0 million loan from Petraco.
Current trading and prospects
Petrosakh continues to refine and sell 100% of its crude oil production into the local refined products market.
The highly competitive refined products market and changes in Excise Tax regulation has caused the Company to constantly reassess its marketing activity. The two main areas under evaluation now are: involvement in bunkering activity and diversification of the sales mix. Subject to developments in tax legislation and market conditions, the Company is currently evaluating the possibility of a partial return to export activities.
The Company continues to upgrade its plant and equipment, to remain in line with statutory requirements for fuel quality. The Company is also seeking and diversify its current customer base, both on the island and in neighbouring regions.
As laid out in the Company's final results for the year ended 31 December 2015, the Board's strategy is to:
- Continue work overs at our two operations, so as to maintain production levels to the greatest extent possible
- Enhance refinery margins at Petrosakh by adjusting its product mix for local sales of products,
- Prepare the Petrosakh refinery so that it is able to accommodate imported crude oil, to increase refinery throughput
- Seek economies where possible to offset Russian Rouble cost inflation
- Delay major capex required to exploit undeveloped reserves at Arcticneft until there is more confidence in the oil market
- Look to acquire further exploration licences for modest considerations and limited initial spending obligations
- Assess the potential to secure long term funding, so that we are able to proceed with the development of the Company's substantial reserve at Arcticneft and drilling at the new licences that we have acquired, as soon as market conditions allow
The Board believes that this strategy is starting to yield positive results, as demonstrated by the improved profitability and cash flow reported in the first half of 2016.
Interim Chief Executive Officer
Dr Svyatoslav Bilibin, (Dr.Sci.Tech. and Corresponding Member of the Russian Academy of Natural Sciences), an independent adviser to Urals Energy, who meets the criteria of a qualified person under the AIM Guidance Note for Mining, Oil and Gas Companies, has reviewed and approved the technical information contained within this announcement. The reserves figures contained within this announcement have not been reviewed in accordance with the AIM Guidance Note for Mining, Oil and Gas Companies and the Company plans to have a review of the Company's assets, in accordance with an appropriate Standard in an updated Competent Person's Report, which the Board intends to commission before the end of 2016.