Urals Energy Public Company Limited Final results for the year ended 31 December 2016 (9640H)

TIDMUEN

RNS Number : 9640H

Urals Energy Public Company Limited

13 June 2017

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). With the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

 
   13 June 2017 
 

Urals Energy PCL ("Urals Energy" or the "Company")

Final results for the year ended 31 December 2016

Urals Energy PCL (AIM: UEN), the independent exploration and production company with operations in Russia, is pleased to announce its audited financial results for the year ended 31 December 2016.

Key statistics for the year ended 31st December 2016 compared with the year ended 31 December 2015:

 
                                             2016       2015   Change 
 
 Total production (barrels)               756,708    675,318     +12% 
 Gross revenue before excise and         US$ 35.3   US$ 31.4 
  export duties                                 m          m     +12% 
 Gross profit after excise, export        US$ 7.3    US$ 7.1 
  duties and VAT                                m          m      +3% 
 Operating profit                        US$2.0 m   US$3.3 m     -39% 
 Normalized EBITDA (see definition 
  below - not audited)                   US$7.8 m   US$7.7 m      +1% 
 Net profit pre-tax and FOREX effects    US$1.0 m   US$2.9 m     -65% 
 Profit (Loss) for the year              US$8.0 m   US($4.1) 
                                                           m 
 

Operational highlights

 
 
        *    Total production at Arcticneft reached 289,986 
             barrels, including four months of Arctic Oil Company 
             Limited ("ANK") production of 39,818 barrels (2015 
             total production of Arcticneft alone: 253,592 
             barrels) 
 
        *    Total production at Petrosakh reached 466,721 barrels 
             (2015: 421,726 barrels) 
 
        *    Average daily production at Arcticneft (without ANK) 
             for the first five months of 2017 was 738 barrels of 
             oil per day ("BOPD"), compared with an average of 684 
             BOPD for the twelve months ended 31 December 2016 
 
        *    Average daily production at ANK for the first five 
             months of 2017 was 312 BOPD 
 
        *    Average daily production at Petrosakh for the first 
             five months of 2017 is 1,134 BOPD, compared with an 
             average of 1,275 BOPD for the twelve months ended 31 
             December 2016 
 
        *    In August 2016 the Company successfully completed the 
             tanker shipment of 225,283 barrels of crude oil from 
             Arcticneft (2015: 217,282 barrels) 
 
        *    In June 2016 Petrosakh was awarded a 25 year 
             exploration and development licence for the South 
             Dagi oil field on Sakhalin Island, following an 
             auction by the Russian State Authorities, with C1 and 
             C2 Russian State Registered reserves of approximately 
             17.7 million barrels 
 
        *    In August 2016, the Company completed the acquisition 
             of ANK. At the time of acquisition ANK was producing 
             340 barrels/day and had 16 million barrels of C1 and 
             C2 Russian State Registered reserves. The acquisition 
             is expected to bring substantial future production 
             economies for the Group 
 
 

Financial highlights

 
 
        *    Gross profit increased by 3% to US$7.3 million (2015: 
             US$7.1 million) 
 
        *    Operating profit of US$2.0 million for the year 
             (2015: US$3.3 million) 
 
        *    Net profit before income tax of US$5.9 million (2015: 
             loss of US$4.3 million). The fluctuation in net 
             profit before income tax was largely caused by 
             exchange rate movements during both years. Underlying 
             net profit before income tax and FOREX effects of 
             US$1.0 million (2015: profit of US$2.9 million) 
 
        *    Normalized EBITDA* of US$7.8 million (2015: US$7.7 
             million), an increase of 1.3% with simultaneous 
             slight decrease of normalized EBITDA margins to 26.8% 
             from 28.5% 
 
        *    Positive net working capital position on 31 December 
             2016 of US$5.6 million (2015: US$0.3 million 
             negative) 
 
        *    The Company finished 2016 with a net debt position of 
             US$5.1 million (2015: US$2.2 million) with 
             Debt/EBITDA ratio of 0.87 as at 31 December 2016 
             (2015: Debt/EBITDA ratio 0.51) 
 

*Earnings before interest, taxation, depreciation and amortisation (hereafter - "Normalised EBITDA" or "EBITDA") is a non-IFRS measure which the Group uses to assess its performance. It is defined as earnings before interest and taxation.

Post-period end and outlook

 
 
        *    In January 2017 the Company announced the granting of 
             conditional share awards over a total of 13,127,192 
             new ordinary shares of US$0.0063 each in the capital 
             of the Company, pursuant to the Company's performance 
             share plan 
 
        *    In February 2017 Petrosakh entered into a new 24 
             month non-revolving CAPEX credit facility with the 
             Sakhalin branch of PJSC Sberbank of Russia, under 
             which Sberbank will provide the sum of 50 million 
             Russian Roubles (representing approximately US$0.9 
             million at prevailing exchange rates) to Petrosakh 
 
        *    In March 2017 Arcticneft entered into a new 
             short-term non-revolving credit facility with 
             Kamchatcomagroprombank. Under the loan the bank will 
             provide a total of 30 million Russian Roubles 
             (representing approximately US$0.5 million at 
             prevailing exchange rates) to Arcticneft. The 
             proceeds of the loan will be used for working capital 
             financing 
 
        *    In April 2017 the Group completed an internal 
             reorganisation of its subsidiaries, which is intended 
             to streamline the management of the Group and allow 
             the Group to take advantage of modest tax advantages 
 
        *    In April 2017 the Company spudded two wells in its 
             subsidiaries: its first well on the Ordymskiy block 
             in the Komi Republic, the second one on the main 
             Petrosakh licence area on the Eastern coast of 
             Sakhalin Island 
 
        *    The planned first shipment of approximately 30,000 
             tons of oil (237,000 barrels) is scheduled for later 
             in June 2017. The tanker has recently arrived at 
             Kolguev Island 
 
        *    In April 2017 the Company entered into a secured 
             short-term loan agreement with Petraco under which 
             Petraco advanced US$3.0 million to the Company. The 
             proceeds of the loan will be used for working capital 
             financing 
 
        *    Extraordinary General Meeting held on 26 May 2017, 
             which resulted in a share consolidation and the 
             approval for a reduction of the Company's share 
             premium account 
 
        *    In June 2017 the Company signed a rig delivery 
             contract with Jereh Group, a Chinese company. The rig 
             will be deployed to drill our first well at South 
             Dagi 
 

Andrew Shrager, Chairman of Urals, commented:

"In 2016, the Company has maintained cash generation, equivalent to EBITDA, at just under US$8 million, despite continued volatility in crude oil and product prices and in the Russian Rouble/Dollar exchange rate, increased production and excise taxes, and local inflation. This was achieved through significant production and revenue increases, both rising by 12%.

Our strong financial position has allowed us to acquire Arctic Oil and also the licence for South Dagi on Sakhalin Island, and thus continue our strategy of acquisitions to broaden our portfolio of licences for development.

Further to our announcements of 18 January 2017, 21 April 2017 and 26 May 2017, once we have received Court approval in Cyprus for the offset of our Cumulative Profit and Loss deficit by our substantial Share Premium Reserve, we will seek further shareholder approval at an EGM for a dividend payment to shareholders. Subject to these approvals, the Board proposes that the maiden dividend should be approximately 6.2 US cents per share, equivalent to approximately 10% of our 2016 EBITDA, costing US$780,000 (GBP604,650). This provides shareholders with their first yield since the listing of the Company, but more importantly it is a statement of our intent to follow a policy of rewarding shareholders as we rebuild the Company.

In 2017, we anticipate maintaining production at current levels on Kolgyev Island and Petrosakh through further work overs. We must be prepared for continued volatility in crude oil prices and exchange rates, and already notice that increased excise taxes on certain refined products may be difficult to pass on to customers. This places significant importance on our drilling programme for this year: we have spudded two key wells, one at Petrosakh as a development well after further studies and one at the Ordymskiy block in the Komi Republic as an exploration well; and we plan to drill our first well on the South Dagi licence once the rig we have leased has been mobilised and deployed. We want to complete our development plans for Kolgyev Island, the Komi companies and South Dagi this year, so we are in a good position to increase production progressively over the next few years. The speed of development will depend on market conditions, as always, but I believe we can be confident that Urals Energy has a bright future."

- Ends -

For further information, please contact:

 
 Urals Energy Public Company Limited 
 Andrew Shrager, Chairman              Tel: [phone] 
 
  Leonid Dyachenko, Chief Executive 
  Officer 
 Sergey Uzornikov, Chief Financial      www.uralsenergy.com 
  Officer 
 
 
 Allenby Capital Limited 
  Nominated Adviser and Broker 
 Nick Naylor                       Tel: [phone] 
                                                   5656 
 Alex Brearley                   www.allenbycapital.com 
 

The accounts for the year ended 31 December 2016 will shortly be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20.

Chief Executive Officer's Statement

Year ended 31 December 2016

Operating environment

In 2016 the Company continued to operate in a challenging environment with high volatility in the market price of crude oil (at an average level of US$44 per barrel, 2015: US$52) as well as high volatility in the Russian foreign exchange market. Domestic prices for light oil products during the year ranged from US$32 to US$92 per barrel (2015: US$38 to US$95).

Operating results

 
                                                      Year ended 
 US$'000                                              31 December 
                                                  ----------------- 
                                                     2016      2015 
------------------------------------------------  -------  -------- 
 
 Gross revenues before excise and export duties    35,309    31,429 
 Net revenues after excise, export duties and 
  VAT                                              29,052    27,213 
 Gross profit                                       7,257     7,115 
 Operating profit                                   2,046     3,337 
 Normalised EBITDA (unaudited)                      7,773     7,743 
 Total net finance income/(expense)                 3,898   (7,590) 
 Profit/(loss) for the year                         8,001   (4,055) 
------------------------------------------------  -------  -------- 
 
 
                                         Year ended 
 Production                              31 December 
                                     ------------------ 
                                         2016      2015 
-----------------------------------  --------  -------- 
 
 Petrosakh barrels                    466,721   421,726 
 Arcticneft barrels                   250,169   253,592 
 Arctic Oil Company barrels            39,818         - 
 Petrosakh BOPD (average)               1,275     1,155 
 Arcticneft BOPD (average)                684       695 
 Arctic Oil Company BOPD (average)        326         - 
 

Summary table: Gross revenues before excise and export duties (US$'000)

 
                                                    Year ended 
                                                    31 December 
-----------------------------------------------  ---------------- 
                                                    2016     2015 
-----------------------------------------------  -------  ------- 
 Crude oil                                        11,817   12,366 
   Export sales                                    9,831   10,078 
   Domestic sales (Russian Federation)             1,986    2,288 
 Petroleum (refined) products - domestic sales    23,349   18,868 
 Other sales                                         143      195 
-----------------------------------------------  -------  ------- 
 Total gross revenues before excise and export 
  duties                                          35,309   31,429 
-----------------------------------------------  -------  ------- 
 

In 2016, total gross revenues increased by US$3.9 million. This increase was primarily due to a US$4.1 million increase in gross revenue in the local market, which was slightly offset by a US$0.2 million decrease in revenues from export shipments. A 19% increase in gross revenue in the local market was a result of a 28% increase in sales volumes and a 7% average increase in refined products prices in Russian Rouble equivalent. These positive factors were partly offset by a 10% average devaluation of the Russian Rouble versus the US Dollar. The lower sales volume in 2015 was due to the fire that occurred at the Petrosakh refinery at the beginning of last year. A 2% decrease in gross revenue from export shipment was the result of a 6% decrease in crude oil sales price (2016: US$44 per barrel, vs 2015: US$46 per barrel) following a decrease in market prices for oil. This was also partially offset by a 4% increase in the volume shipped in 2016.

Volatility in foreign exchange rates during the year 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 6% decrease in net back prices for crude oil domestic sales is broadly in line with the 10% average devaluation of the Russian Rouble versus the US Dollar.

In 2016, there was a substantial increase in the Excise Tax for gasoline, which represented a total increase of 47.3%. In addition, several diesel fractions, which represent around 31% of refined products sales of the Company, became to be subject to Excise Tax. The combination of this new regulation and a constant sales volume, led to the overall Excise Tax burden on the Company increasing by 119% in 2016.

This was combined with increases in the cost of a newer additive and transportation costs, which in total, led to a 20% 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$/barrel)

 
                                                    Year ended 
                                                    31 December 
-----------------------------------------------  --------------- 
                                                    2016    2015 
-----------------------------------------------  -------  ------ 
 Crude oil                                         33.15   34.02 
   Export sales                                    31.42   31.65 
   Domestic sales (Russian Federation)             41.29   43.97 
 Petroleum (refined) products - domestic sales     41.02   51.06 
-----------------------------------------------  -------  ------ 
 

Gross profit (net revenues less cost of sales) in 2016 increased by 3% to US$7.3 million, from a profit of US$7.1 million in 2015. The growth in sales volumes by 16% and the increase in average sales prices in the local market by 7% were offset by the increases in Excise tax and cost of sales.

Cost of sales in 2016 totaled US$21.8 million, as compared with US$20.1 million in 2015, of which US$5.3 million and US$4.6 million respectively represented non-cash items, principally depreciation, amortisation and depletion. Two factors influenced the operating costs of the Company in 2016: the devaluation of the Russian Rouble versus the US Dollar; and Rouble costs. The Company increased its operating costs in Russian Rouble equivalent by 19% compared with that in 2015. The increase of operating cost in Russian Rouble equivalent is a combination of:

-- a 22% increase in employee costs at production entities (broadly representing inflation for two years and increases due to the implementation of a new motivation system at the subsidiaries); and

-- a 105% 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 increased during 2016 to US$4.4 million from US$3.9 million in 2015. The Company had an average increase of 22% in Russian Rouble denominated selling, general and administrative costs in the reporting period, as compared with the previous period. The main driver of this rise was increased storage and transportation expenses related to small-scale wholesale activities at Petrosakh (including cost of fuel used for transportation), and the additional general and administrative expenses of the two acquired companies, BVN-Oil and RK-Oil.

Net finance income during 2016 was US$3.9 million (2015: US$7.6 million net finance expenses). Net finance income for the period primarily consisted of exchange rate movements from the strengthening of Russian Rouble vs US Dollar at the end of 2016, offset by the interest accrued on the borrowings.

Operating profit, net of finance income and reversal of an uncertain tax position provision of US$2.7 million in 2016 resulted in a net profit for the year of US$8.0 million (2015: US$4.1 million loss).

The increase in sales volumes in 2016 offset by increases in both Excise Tax expenses and cost of sales and selling expenses resulted in a consolidated normalised EBITDA of US$7.8 million, compared with US$7.7 million in 2015, with EBITDA margins of 26.8% and 28.5% respectively.

Management EBITDA (US$'000) - Unaudited

 
                                                     Year ended 
                                                     31 December 
-----------------------------------------------  ------------------ 
                                                     2016      2015 
-----------------------------------------------  --------  -------- 
 Profit(loss) for the year                          8,001   (4,055) 
 Income tax benefit                               (2,057)     (198) 
 Net interest and foreign currency (gain)/loss    (3,898)     7,590 
 Depreciation, depletion and amortization*          4,730     4,329 
-----------------------------------------------  --------  -------- 
 Total non-cash (income)/expense                  (1,225)    11,721 
 (Release of)/Charge for provision on 
  claims                                              138     (864) 
 Other non-recurrent losses/(income)                  859       941 
-----------------------------------------------  --------  -------- 
 Total non-recurrent and non-cash items               997        77 
 
   Normalised EBITDA                                7,773     7,743 
-----------------------------------------------  --------  -------- 
 
 

*-Depreciation, depletion and amortisation ("DDA") expense is different from the amount presented in consolidated financial statements by the share in DDA included in the cost of finished goods unsold as of the balance sheet date.

Net debt position

As at 31 December 2016, the Company had net debt of US$5.1 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.

As at 31 December 2016, the total borrowing of the Company was US$6.8 million (2015: US$3.9 million), including a US$4.1 million 18 month revolving credit facility from the Sakhalin branch of PJSC Sberbank of Russia, US$2.1 million of debt which was acquired with two private Russian companies, RK-Oil and BVN Oil and US$0.5 million of short term borrowings from Kamchatcomagroprombank.

Operational update

Petrosakh

As stated previously, the Board 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.

After additional geological assessment the Company spudded a new well in April 2017, with an intended target depth of 1,600 metres. This well is located on the main Petrosakh licence area on the Eastern coast of Sakhalin Island. As of today, good progress has been made and drilling has reached approximately 1,405 metres.

In the South Dagi area the Company is now actively working on the preparation of the field development plan, an exploration drilling project and a trial production project involving new exploration wells. The most significant element of the development plan documentation will be finalized by the 4th quarter of 2017.

In June 2017, the Company signed a rig delivery contract with Jereh Group, a Chinese company. The rig will be deployed to drill our first well at South Dagi.

Downstream

Petrosakh continues to refine 100% of its crude oil production and sell all of its refined products to the local market.

The highly competitive refined products market and changes in Excise tax regulation have caused the Company to constantly reassess its marketing activity and diversify its current customer base, both on the island and in neighbouring regions.

During the year, the Company started the process of renewing its terminal license and expects to finalize this process in the summer of 2017. This will allow the Company to be involved in bunkering activity as well as to partially return to export activity, depending on potential net backs.

At the beginning of 2017, the Company entered into a new 24 month non-revolving CAPEX credit facility for acquisition of storage facilities for refined products in Yuzhno-Sakhalinsk on Sakhalin Island. This acquisition should allow the Company to increase turnover and net backs in new niche areas, including small wholesale and retail, as well as obtaining substantial savings in commercial and transportation expenses.

The Company continues to upgrade its plant equipment to remain in line with statutory requirements for fuel quality and to decrease cost of refining.

Arcticneft

During the reporting period, the main efforts of the Company continued be a focus on minimizing the natural decline in production through workovers. The acquisition of Arctic Oil Company has brought additional daily production of 326 barrels/day in 2016. During the year, the Company perforated, re-entered and performed acid stimulation of several wells. This led to a stable production level during the year under report.

After a preliminary analysis of the well stock, the Company decided to concentrate on re-entering several wells on the new field with further workovers and shift to artificial oil lifting using jack pumps.

This approach has proven effective and the Board believes that it should enable production levels to be maintained.

Taxation

At the end of 2014, the Russian government adopted changes in tax policy that provided for a gradual increase in mineral extraction tax, combined with a simultaneous decrease in export duty for the period 2015-2017. Following this tax policy, an additional set of changes in the Russian tax legislation were approved at the end of 2016, which will have an impact on financial and operating activity of the Group in 2017.

Subject to the current macroeconomic situation, the main effect of these changes for 2017 is the following:

- Decreases in export duty have been unfrozen. Changes in the coefficient used for calculations will result in an average decrease in export duty of 21% per ton of exported oil

   -      Mineral extraction tax will increase by 7% per ton of oil produced 
   -      Excise tax for 'EURO -V' gasoline will stay at the 2016 level 
   -      Excise tax for several diesel fractions introduced in 2016 will increase by 47% 

The Board anticipates that the new changes in the tax legislation will increase the tax burden on the Group.

Strategy

Our strategy is to exploit our expanded portfolio of proven and probable reserves through planned field developments over the next couple of years. We intend to explore partnerships with oil service companies as well as possible co-operation with companies with complimentary operations, for example in the Komi region.

Our strong financial position means that we can still take advantage of opportunities to acquire additional licences in our three principal areas, as well as undertake work overs and fund exploratory wells from our own resources. The volatility of international oil prices and the tendency for it to be somewhat compensated by the effect on the Rouble/Dollar exchange rate, combined with the Russian tax regime, does reduce the volatility that Urals Energy sees in its cash generation per barrel, as evidenced by our performance over the last two years, and should allow us to operate with confidence in the Russian market.

The Board remains confident that with this low risk approach, we will be in a strong position to grow the Company.

Further to the Company's announcements made on 18 January 2017, 21 April 2017 and 26 May 2017, once the Company has received Court approval in Cyprus for the offset of our Cumulative Profit and Loss deficit by our substantial Share Premium Reserve, the Company intends to seek further shareholder approval at an Extraordinary General Meeting for a dividend payment to shareholders. Subject to the approval of Shareholder and the Cyprus Courts, the Board proposes that the maiden dividend should be approximately 6.2 US cents per share, equivalent to approximately 10% of the Group's 2016 EBITDA, costing approximately US$780,000. Further announcements will be made as appropriate.

Leonid Dyachenko

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 has commissioned in for publication in 2017.

Please click on, or paste the following link into your web browser, to view the associated consolidated financial statements for Urals Energy Public Company Limited as of and for the year ended 31 December 2016 as a PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/9640H_-2017-6-13.pdf

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR LXLFFDQFLBBQ

(END) Dow Jones Newswires

June 13, 2017 08:51 ET (12:51 GMT)