Petroneft Resources PLC 2015 Final Results (0187C)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
PetroNeft Resources Plc	AQSE:PTR.GB	Aquis Stock Exchange	Ordinary Share	IE00B0Q82B24

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PetroNeft Resources (AQSE:PTR.GB)
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RNS Number : 0187C

Petroneft Resources PLC

23 June 2016

PetroNeft Resources plc

("PetroNeft" or the "Group" or the "Company")

2015 Final Results

PetroNeft (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its final results for the year ended 31 December 2015. In addition, PetroNeft announces that the Company's Annual Report and Accounts for 2015 and Notice of the 2016 AGM will be mailed to shareholders and will be available online at the Company's website www.petroneft.com on or before Thursday 30 June 2016.

Highlights

   --     Gross production 737,655 barrels of oil from Licence 61 in 2015

o Average gross production of 2,021 bopd

o Current gross production about 3,000 bopd

   --     11 Wells drilled in 2015 
   --     1,000 km of 2D seismic acquired at Licence 61 in 2015 
   --     65.5 mmbbls total 2P reserves net to PetroNeft

Outlook

   --     Further production increases likely from South Arbuzovskoye

-- Drilling at Sibkrayevskoye No. 374 due to commence in July 2016 - potential for material increase in reserves

   --     Active, fully funded work programme planned at Licence 61 in 2016 and 2017

Dennis Francis, Chief Executive Officer of PetroNeft Resources plc, commented:

"2015 was a busy year for PetroNeft, during which the company carried out an extensive drilling programme, in partnership with Oil India, across Licence 61. We have gained significant experience in horizontal drilling, deepened our understanding of the Licence and have identified additional upside at Sibkrayevskoye and South Arbuzovskoye.

After 3 weeks of production the A-214 horizontal well at South Arbuzovskoye is still producing over 850 bopd and the pressure decline is very slow. In the near term we look forward to the A-215 horizontal well results at South Arbuzovskoye and the commencement of drilling on the S-374 delineation well at Sibkrayevskoye."

For further information, contact:

 
 Dennis Francis, CEO, PetroNeft Resources    +1 713 988 
  plc                                              2500 
 Paul Dowling, CFO, PetroNeft Resources      +353 1 647 
  plc                                              0280 
 John Frain/Brian Garrahy, Davy (NOMAD       +353 1 679 
  and Joint Broker)                                6363 
 Henry Fitzgerald-O'Connor, Canaccord           +44 207 
  Genuity Limited (Joint Broker)               523 8000 
 Martin Jackson/Shabnam Bashir, Citigate        +44 207 
  Dewe Rogerson                                638 9571 
 Joe Heron / Douglas Keatinge, Murray        +353 1 498 
  Consultants                                      0300

The information contained in this announcement has been reviewed and verified by Mr. Dennis Francis, Director and Chief Executive Officer of PetroNeft, for the purposes of the Note for Mining, Oil and Gas Companies issued by the London Stock Exchange in June 2009. Mr. Francis holds a B.S. Degree in Geophysical Engineering and a M.S. Degree in Geology from the Colorado School of Mines. He has also graduated from the Harvard University Program for Management Development. He is a member of the American Association of Petroleum Geologists and the Society of Exploration Geophysicists. He has over 40 years' experience in oil and gas exploration and development.

PetroNeft Resources plc

Final Results

for the year ended 31 December 2015

Forward Looking Statements

This report contains forward-looking statements. These statements relate to the Group's future prospects, developments and business strategies. Forward-looking statements are identified by their use of terms and phrases such as 'believe', 'could', 'envisage', 'potential', 'estimate', 'expect', 'may', 'will' or the negative of those, variations or comparable expressions, including references to assumptions.

The forward-looking statements in this report are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These forward-looking statements speak only as at the date of these financial statements.

Chairman's Statement

2015 was a busy year for our Company particularly with our partner, Oil India, at Licence 61 where we drilled wells at Tungolskoye, Arbuzovskoye, Sibkrayevskoye and Lineynoye and completed a major 2D seismic acquisition programme. The work programme saw a mix of successes, challenges and disappointments. 2015 also saw further challenges for the industry as a whole with further significant weakness in the oil price internationally.

Operations

The existing production wells at Lineynoye and Arbuzovskoye performed well during 2015 but continued to decline naturally as expected. The main development programme in the year was bringing the Tungolskoye oil field into production. Unfortunately, the J1-2 horizon was unexpectedly absent from some wells and the oil-water contact on the eastern side of the field is shallower than expected based on previous drilling and seismic data. As a result, the number of wells in the programme was reduced which meant we could not achieve the anticipated production, however, we did gain considerable additional experience in drilling horizontal wells particularly being able to keep the well within a narrow zone over the 1,000 metre horizontal segment.

In late May 2015 we announced the results of a delineation well at Sibkrayevskoye. The S-373 well found net pay of 11.5 metres and achieved a stabilised natural flow of 100 bopd from a cased hole test. This along with the newly acquired 2D seismic has provided further evidence of the quality and size of the Sibkrayevskoye oil field and we are now actively planning for development activities.

2016-17 work programme

Following up on the drilling results at Arbuzovskoye and Sibkrayevskoye in 2014 and 2015 as well as the new seismic data, we will be developing the southern part of the Arbuzovskoye oil field in 2016. We will also drill another delineation well at Sibkrayevskoye in 2016 with a view to commencing development of Sibkrayevskoye in 2017. Oil India have agreed to provide all the funding for these two projects by way of a shareholder loan to the joint venture company. We have already seen some excellent results from the first two wells at South Arbuzovskoye and gross production at Licence 61 is currently about 3,000 bopd (1,500 bopd net to PetroNeft).

Reserves

Ryder Scott have prepared a report as at 1 January 2016 on the reserves of Licence 61. While the reserves have fallen, primarily at Tungolskoye, the report demonstrates the large potential of the Sibkrayevskoye oil field which we expect to start developing in 2017. While the increase in 2P reserves at Sibkrayevskoye as a result of the S-373 well was modest, this was due to its proximity to previous wells. However, the seismic data has shown that the field is likely to be significantly larger and we hope that a successful result from the S-374 well will lead to a more significant increase in 2P reserves.

 
 Ryder Scott Estimated Reserves in Oil Fields (net 
  to PetroNeft) 
 
 
 Oil Field Name             Proved        Proved       Proved, 
                                      & Probable      Probable 
                                                    & Possible 
------------------------  --------  ------------  ------------ 
 Licence 61                1P mmbo       2P mmbo       3P mmbo 
   Lineynoye                   7.1          13.0          16.0 
   Tungolskoye                 0.4           2.9           3.7 
   Kondrashevskoye             0.7           1.3           1.6 
   Arbuzovskoye                2.0           4.5           5.7 
   Sibkrayevskoye              5.8          29.4          52.8 
   North Varyakhskoye          0.2           0.4           0.5 
                          --------  ------------  ------------ 
                              16.2          51.5          80.3 
 Licence 67 
   Ledovoye                    1.5          14.0          17.4 
 
 Total net to PetroNeft       17.7          65.5          97.7 
                          ========  ============  ============ 
 
   --    Licence 61 as at 31 December 2015 (Ryder Scott report as at 1 January 2016). 
   --    Reserves reflect just PetroNeft's 50% share of reserves for each licence. 
   --    All oil in discovered fields is in the Upper Jurassic section.

-- Reserves were determined in accordance with the Society of Petroleum Engineers ("SPE") Petroleum Resources Management System ("PRMS") rules.

-- Licence 67 will be co-developed with Arawak Energy and the reserves above reflect PetroNeft's 50% share as per the most recent Ryder Scott report as at 1 January 2011.

Engagement with Natlata

Following extensive engagement with our largest shareholder, Natlata Partners Limited ("Natlata"), during 2015 and in connection with their requisitioned EGM, in April 2016 we announced that we reached an agreement on a new Board composition and structure. This involved the appointment Maxim Korobov as non-executive Director and Anthony Sacca and David Sturt as independent non-executive Directors. David Sanders, Gerry Fagan and Paul Dowling left the Board. Mr. Dowling remains CFO of the Company. The agreement includes a commitment from Natlata that it will support the newly constituted Board for a period of two years.

Also, Pavel Tetyakov of Natlata has joined the Company and will be responsible for new business development in Russia.

I would like to thank David Sanders, who was a founder of the Company, and Gerry Fagan for their many years of service to the Company. I would also like to thank Vakha Sobraliev, who resigned from the Board in September 2015 for his contribution to the Company over the previous ten years.

Review of PetroNeft loss for the year

The loss after taxation for the year was US$8,474,383 (2014: US$8,784,385). The loss included a foreign exchange loss on intra-group loans of US$0.3 million (2014: US$2.4 million) the share of joint venture's net loss in WorldAce Investments of US$8,765,055 which was after an impairment loss within WorldAce of US$4.55 million (US$9.1 million gross). The loss on the disposal of a subsidiary of US$5.6 million in 2014 relates to the farmout of Licence 61 and more details can be found at Note 4 to the financial statements. Finance costs in 2014 of US$1.6 million relate to interest on the loans from Macquarie and Arawak for the period to 3 July 2014 when the loans were repaid in full.

As mentioned above, the Licence 61 Farmout was completed on 3 July 2014. For accounting purposes the results of the WorldAce Group are fully consolidated in the PetroNeft Income statement up to that date. After that date PetroNeft must account for its share of the results of the WorldAce Group using the equity method of accounting. Furthermore, interest receivable on loans to the WorldAce Group, which up to 3 July 2014 would have been eliminated on consolidation, is included as income in the PetroNeft consolidated income statement after that date. The 2015 numbers reflect the new arrangements in full.

 
  PetroNeft Key Financial Metrics        2015       2014 
  Continuing operations               US$'000    US$'000 
 Revenue                                2,398     19,165 
 Cost of sales                        (2,371)   (15,233) 
                                     ======== 
 Gross profit                              27      3,932 
 Administrative expenses              (1,380)    (3,678) 
 Exchange loss on intra-Group 
  loans                                 (284)    (2,402) 
 Operating loss                       (1,637)    (2,148) 
 Loss on disposal of subsidiary 
  undertaking                               -    (5,569) 
 Share of joint venture's net 
  loss - WorldAce Investments 
  Limited                             (8,765)      (304) 
 Share of joint venture's net 
  loss - Russian BD Holdings 
  B.V.                                  (315)      (294) 
 Finance revenue                        3,042      1,551 
 Finance costs                              -    (1,612) 
 Loss for the year for continuing 
  operations before taxation          (7,675)    (8,376) 
 Income tax expense                     (799)      (408) 
 Loss for the year                    (8,474)    (8,784) 
                                     ========  =========

Revenue

Revenue in 2015 includes income as operator of both licences and the revenue of PetroNeft's wholly owned subsidiary, Granite Construction in respect of construction services provided in relation to both joint ventures. Revenue in 2014 includes revenues from oil sales for the period to 3 July 2014 of US$17.5m and income as operator of both licences of US$1.7 million.

Income of PetroNeft Group as Operator of Licence 61 and Licence 67

In the joint venture agreements related to both Licence 61 and Licence 67, PetroNeft is designated as the operator of each Licence. This means that PetroNeft employees and management are responsible for the day to day running of both Licences. Major strategic and financial decisions relating to the Licences require unanimous approval by both shareholders in the respective joint venture agreements.

As PetroNeft management and employees are responsible for day to day matters in both Licences, PetroNeft is entitled to recover a portion of its expenses from the joint ventures. In that regard we established a management group of key Russian employees who are employed by the PetroNeft subsidiary Dolomite. Both PetroNeft and Dolomite invoice for their services to the joint ventures based on rates pre-agreed with our respective joint venture partners. The costs associated with this revenue are included in cost of sales.

In 2015 PetroNeft Group charged a total of US$1.6 million (2014: US$1.2 million) to the joint ventures in respect of management services. PetroNeft also owns a small construction company, Granite Construction, which carries out small ad hoc construction projects such as well pads and on-site accommodation on both Licences. In 2015 Granite Construction charged the WorldAce Group US$0.8 million (2014: US$0.5 million) in respect of these services.

Finance Revenue

Most of the finance revenue relates to Interest receivable on loans to joint ventures. During 2015 PetroNeft had interest receivable of US$2,826,303 (2014: US$1,415,202) on its loans to WorldAce Group and US$205,189 (2014: US$117,120) on its loans to Russian BD Holdings B.V.

Key Financial Metrics - WorldAce Group

Because of the above accounting implications it is difficult to extract meaningful metrics from the PetroNeft consolidated income statement. Therefore the metrics below are an extraction from the audited financial statements of the WorldAce Group and give an indication as to the performance of Licence 61:

 
                               PetroNeft's    PetroNeft's    100% of WorldAce 
                                 50% share      50% share       2015       2014 
                                      2015       3 July - 
                                              31 December 
                                                     2014 
                                   US$'000        US$'000    US$'000    US$'000 
 Continuing operations 
 Revenue                            10,300          5,846     20,600     29,289 
 Cost of sales                    (10,436)        (5,451)   (20,871)   (26,379) 
                              ============ 
 Gross profit                        (136)            395      (271)      2,910 
 Gross margin %                     (1.3%)           6.8%     (1.3%)      10.0% 
 Administrative expenses           (1,519)        (1,027)    (3,038)    (5,129) 
 Impairment of oil 
  and gas properties               (4,550)              -    (9,100)          - 
                              ============ 
 Operating loss                    (6,205)          (632)   (12,409)    (2,219) 
 Finance revenue                        12              5         23         16 
 Finance costs                     (2,572)          (877)    (5,144)    (1,818) 
                              ============ 
 Loss for the period 
  for continuing operations 
  before taxation                  (8,765)        (1,504)   (17,530)    (4,021) 
 Income tax credit                       -          1,200          -      2,400 
                              ============ 
 Loss for the period 
  for continuing operations 
  before taxation                  (8,765)          (304)   (17,530)    (1,621) 
                              ============  =============  =========  =========

Net Loss - WorldAce Group

The net loss of WorldAce Group for the full year increased to US$17,530,110 from US$1,621,345 in 2014. The increase in the loss for the year before taxation can be attributed to higher interest payable on loans from shareholders in 2015 as a result of additional loans provided by Oil India Limited to WorldAce as part of the Licence 61 Farmout. Of the US$5.1 million in interest payable by WorldAce, US$2.8 million is payable to PetroNeft. Due to the lower oil price environment and a reduction in reserves at the Lineynoye oil field an impairment of oil and gas properties in the amount of US$9.1 million was required.

Revenue, Cost of Sales and Gross Margin - WorldAce Group

Revenue from oil sales was US$20,600,188 for the year (2014: US$29,288,078). Cost of sales includes depreciation of US$2,856,469 (2014: US$3,547,979), which was lower mainly because of the weaker Rouble. The gross margin fell during the year primarily due to an increase in Mineral Extraction Tax in 2015 but also due to lower oil prices. Operating costs per barrel produced (Cost of Sales excluding depreciation and Mineral Extraction Tax) was steady at US$11.68 (2014: US$11.67 per barrel). We would expect the gross margin to improve in future periods as our facilities and field operations are fully staffed and can handle additional production from the South Arbuzovskoye oil field under the current cost structure and do not expect to add significant additional costs once Sibkrayevskoye comes online. We produced 737,655 barrels of oil (2014: 728,826 barrels) in the year and sold 761,123 barrels of oil (2014: 704,189 barrels) achieving an average oil price of US$27.00 per barrel (2014: US$41.59 per barrel). All oil was sold on the domestic market in Russia.

Finance Costs - WorldAce Group

Finance costs of US$5,144,634 (2014: US$1,818,438) relate to interest on loans from PetroNeft and Oil India.

Taxation - WorldAce Group

The tax credit in 2014 arose on the reversal of a deferred tax charge of US$2,400,000 in relation to temporary differences in Russia. There is no tax payable in 2015.

Future Funding of PetroNeft Group

PetroNeft is currently debt free. As part of Licence 61 Farmout, Oil India provided exploration and development funding of US$45 million through the jointly controlled entity WorldAce. Oil India has also agreed to provide funding for the development of South Arbuzovskoye and Sibkrayevskoye by way of an unsecured shareholder loan to WorldAce Group, thereby removing the funding requirement from PetroNeft for this work. The first tranche of this funding was agreed by way of an unsecured US$10 million shareholder loan from Oil India to WorldAce in March 2016. Principal repayments on the loan will not commence until October 2019. However, should there be a significant change in the management of PetroNeft while the loan is outstanding then Oil India may seek early repayment in full. In such circumstances Petroneft would need to provide its 50% share of the amount outstanding. It is expected that PetroNeft will commence collection of interest receivable on its loans to WorldAce in the second half of 2017.

Summary

We learned a lot in 2015 particularly in the experience gained in horizontal drilling and the additional upside identified at Sibkrayevskoye and South Arbuzovskoye. After 3 weeks of production the A-214 horizontal well at South Arbuzovskoye is still producing over 850 bopd and the pressure decline is very slow. We also now have enough production data at A-213 to register the reserves in the new J1-2 oil pool and will add production from the primary J1-1 interval in this well shortly. Both of these are excellent results. In the near term we look forward to the A-215 horizontal well results at South Arbuzovskoye and the commencement of drilling on the S-374 delineation well at Sibkrayevskoye. The Company is fortunate in that we have quality assets that are economic in a low oil price environment. With an excellent partner in Oil India we are well placed to exploit these opportunities despite the challenging times for our industry.

Annual Report and AGM

The annual report will be mailed to shareholders and published on the Company's website (www.petroneft.com) by 30 June 2016. The AGM will be held in Dublin on 16 September 2016.

Finally, I know that I speak for all the Directors, management and staff of the Group in giving sincere thanks to our shareholders, both old and new, for your continued support throughout the past year.

David Golder

Non-Executive Chairman

Consolidated Income Statement