Post year-end trading update and proposed capital reduction, share consolidation and dividend policy

18 January 2017

Urals Energy PCL ("Urals Energy" or the "Company")
Post year-end trading update and proposed capital reduction, share consolidation and dividend policy

Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR).

The board (the "Board") of Urals Energy PCL (AIM: UEN), the independent exploration and production company with operations in Russia, provides a post year-end update on trading for the year ended 31 December 2016 and the outlook for 2017. The Board also provides details of an intended capital reduction and share consolidation and a proposed dividend policy for the Company.

Post year end trading update

The Group's total oil production in 2016 was 756,690 barrels.

Over 2016, Group production excluding almost four months of production from our new subsidiary, Arctic Oil (which was acquired on 5 September 2016), was 716,873 barrels, which represents an increase of 6.1% over the Group's total production of 675,317 barrels in 2015.

At the end of 2016, the total volume of commercial crude produced on Kolguev Island was approximately 155,000 barrels. As announced previously, the Company plans to make two cargo deliveries from our Kolguev sea terminal this year, most likely in or around June 2017 and during October 2017.

Improvements in the quality of our refined products via the use of new additives and an increased competitiveness of our products in the local market on Sakhalin Island has resulted in sales volumes at Sakhalin (in tons) increasing by 12.7% in the fourth quarter of 2016, when compared to the same period in 2015.

At the end of 2016, additional changes to Russian tax legislation were approved by the Russian government. These provide for an increase in Mineral Extraction Tax, but with a simultaneous decrease in Export Duty for 2017, plus an increase in diesel and diesel fractions excise tax. The Board has evaluated the influence of these changes on the financial position of the Group's subsidiaries. Having considered various scenarios, the Board believes that the new changes should have a positive impact on Arcticneft and Arctic Oil, as an increase in Mineral Extraction Tax should be more than offset by a decrease in Export Duty. At Petrosakh, given that approximately 28% of refined products are subject to excise changes, the Board anticipates that the changes in the tax legislation are likely to increase the tax burden on this subsidiary, but the extent of this increase will be highly dependent on changes in the retail prices of oil products in the local market.

As noted in earlier announcements, the Company is preparing development plans for approval by the Russian Federal Authorities for its operations: i) at Kolguyev Island, following the acquisition of Artic Oil; ii) for our two companies in Komi (BVN Oil and RK-Oil); and iii) for the South Dagi licence on Sakhalin Island. These plans, once approved, will involve a considerable step up in our drilling programme, which this year currently envisages just two new wells and a continuing workover programme.

The Board has started to investigate potential partnerships to finance and share risk in the execution of our development plans, but this will take time.

Proposed capital reduction, share consolidation and dividend policy

The Board intends to commence the process to seek approval from the shareholders, by way of special (75% majority) resolution, and the sanction of the Cyprus Court, in order to perform a capital reduction by way of cancelling amounts credited in the Company's share premium account and writing-off the Company's accumulated losses.

At present, the Company has a large share premium reserve, as a result of earlier share issues at substantial premiums. On the other hand, it has substantial accumulated losses in its profit and loss balance, mostly due to the large write-offs incurred after 2008. While this large loss remains, it will not be possible to reward shareholders with dividends from the improved performance of the Company. The effect of the proposed capital reduction, if approved and finalised, will be to offset the Company's accumulated losses against its capital reserve, but still leave a balance of positive capital reserves, to allow the Company to pay dividends in due course.

The Board also intends to commence the process to seek approval from shareholders in order to consolidate the Company's share capital. The Board believes that a share consolidation may assist in reducing the volatility in the Company's share price and enable a more consistent valuation of the Company. The Board also believes that the bid/offer spread on shares priced at low absolute levels can be disproportionate to the share price and therefore to the detriment of shareholders. At this stage, the extent to which the Company's shares will be consolidated has not been finalised.

Subject to shareholder approval of the capital reduction, it would be the Board's intention to propose a dividend policy that is linked to the Group's EBITDA, which the Board believes is the best indicator of the Group's cash generation, but subject to adjustments if there are large negative swings in exchange rates and other factors which might affect its reported profit for the year.

Further announcements in respect of the above matters will be made in due course as appropriate.

Andrew Shrager, Chairman, commented: "With the recovery in the oil price to a range of $50 to $60 per barrel, we believe that now is the right time to start making preparations for a significant step up in the development of our reserves, both those that are long-held and those resulting from our recent acquisitions and new licence awards. The Development Plans are the first step in this process and we hope to have these approved during the course of this year. We will proceed with caution, keeping sufficient flexibility in the plans to avoid the risk of over expansion in what is likely to remain a volatile oil market".

 

For further information, please contact:

Urals Energy Public Company Limited
Andrew Shrager, Chairman
Leonid Dyachenko, Chief Executive Officer
Tel: +7 495 795 0300, www.uralsenergy.com

Allenby Capital Limited, Nominated Adviser and Broker
Nick Naylor / Alex Brearley
Tel: +44 (0) 20 3328 5656, www.allenbycapital.com

 

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