Urals Energy Public Company Limited Final Results (4147C)

TIDMUEN

RNS Number : 4147C

Urals Energy Public Company Limited

28 June 2016

 
   28 June 2016 
 

Urals Energy Public Company Limited

("Urals Energy" or the "Company")

Final results for the year ended 31 December 2015

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 2015.

Key statistics for the year ended 31st December 2015 compared with same period in 2014:

 
                                    2015        2014 
 
 Total production (barrels)      675,318     662,215     +2% 
 Gross revenue before excise    US$ 31.4     US$58.2 
  and export duties                    m           m    -46% 
 Gross profit after excise,      US$ 7.1      US$8.7 
  export duties and VAT                m           m    -18% 
 Operating profit               US$3.37m   US$ 1.17m   +188% 
 EBITDA (see definition           US$7.7      US$8.1 
  below - not audited)                 m           m    - 5% 
 Net profit pre tax and           US$2.9      US$1.6 
  FX effects                           m           m    +81% 
                                  US$4.1     US$13.7 
 Loss for the year                     m           m    -70% 
 

Operational highlights

   --     Total production at Arcticneft reached 253,592 barrels (2014: 240,865  barrels) 
   --     Total production at Petrosakh reached 421,726  barrels (2014: 421,350  barrels) 

-- Current daily production at Arcticneft is 676 BOPD compared with an average of 695 BOPD for the twelve months ended 31 December 2015

-- Current daily production at Petrosakh is 1,317 BOPD, 14% higher than an average of 1,155 BOPD for the twelve months ended 31 December 2015

-- In August 2015 the Company successfully completed the shipment of 217,282 bbls of crude oil from Arcticneft (2014: 207,940 bbls)

-- In 2015 the Company completed the drilling of two wells and started to drill a third well at Petrosakh and this has enabled the Company to maintain stable production during the reporting period

-- In 2015 the Company successfully implemented a work over program of re-entering existing wells in Arcticneft which resulted in a 5.3% increase in yearly production

-- In October 2015 the Company expanded the boundaries of its license area at Arcticneft and added ABC1 reserves of 1.3 million tonnes (10.3 million barrels of oil)

-- In November 2015 the Company acquired two companies (RK-Oil Limited and BVN Oil Limited) which hold licenses in the Komi region. The licenses presently have indicated oil reserves of 2.0 million tons C1 and C2 (equivalent to 14.9 million barrels), and possible recoverable resources (D1) of 4.6 million tons (equivalent to 34.3 million barrels)

Financial highlights

   --     Gross profit reduced by 18% to US$7.1 million (2014: US$8.7 million) 
   --     Operating profit of US$3.3 million for the year (2014: US$1.2 million) 

-- Net loss before income tax of US$4.3 million in 2015 (2014: net loss of US$16.1 million) caused by exchange rate movements during both 2015 and 2014. Without the foreign currency losses of US$7.2 million in 2015 and US$17.7 million in 2014, profit before income tax for the year would have increased in 2015 by US$1.3 million. A significant portion of foreign currency losses relate to intercompany loans denominated in US$.

-- EBITDA* decreased to US$7.7 million from US$8.1 million in 2014, a decrease of 4.9% with simultaneous growth of EBITDA margins to 28.5% from 18.2%

-- Negative net working capital position on 31 December 2015 of US$0.3 million (2014: US$1.6 million positive)

-- Continuous effective cost management in the period allowed the Company to decrease the operating costs and SG&A costs in Russian Rouble equivalent by 8.2% and 5% respectively, in addition to a decrease of 70% in US$ denominated G&A.

-- Net cash generated from operating activities allowed the Company to finance the acquisition of new exploration licences. At the same time, in line with its development strategy the Company entered into an 18 month revolving credit facility for working capital financing with the Sakhalin branch of OJSC Sberbank of Russia

-- The Company finished 2015 with a net debt position of US$2.2 million (2014: net cash US$4.4 million) with Debt/EBITDA ratio equal 0.51 as at 31 December 2015

*Earnings before interest, taxation, depreciation and amortisation ("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 March 2016 the Company completed Well 109 drilling at Petrosakh which is now at the stage of testing and workover, bur requires further intervention

-- The annual planned tanker shipment for export from Arcticneft to Petraco is expected in July - August

2016.    The estimated shipment based on current daily production is around 230,000 bbls 

-- In May 2016 the Company entered into a secured short-term loan agreement with Petraco under which Petraco advanced US$6 million to the Company. The proceeds of the Loan will be used to working capital financing

-- In June 2016 the Company has been 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 Russian State Registered reserves C1 plus C2, equivalent to 2P (proven and probable) around 17.7 million barrels

Andrew Shrager, Chairman of Urals, commented: "Our results show that the Company has weathered a truly extraordinary period of volatility in the oil price and the FX markets. We have been able to maintain production, reduce costs substantially, particularly costs denominated in US dollars, and moderate the fall in our cash generation which can be seen in the modest fall in EBITDA. Our strategy continues to be to use our cash generation to invest in workovers to maintain production and to acquire licences. We now have a substantial portfolio of additional proven and probable reserves that can be developed as conditions improve. There has been little or no competition in acquiring licences as other companies tend to be either highly leveraged or not generating cash. We will continue to be cautious in 2016, maintain our production levels and seek potential acquisitions."

Ends -

For further information, please contact:

 
 Urals Energy Public Company 
  Limited 
 Andrew Shrager, Chairman          Tel: [phone] 
  Leonid Dyachenko, Interim                   0300 
  Chief Executive Officer 
 Sergey Uzornikov, Chief       www.uralsenergy.com 
  Financial Officer 
 
 
 Allenby Capital Limited 
  Nominated Adviser and Broker 
 Nick Naylor                            Tel: +44 (0) 20 
                                              3328 5656 
 Alex Brearley                   www.allenbycapital.com 
 

The accounts for the year ended 31 December 2015 will shortly be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20.

Interim Chief Executive Officer's Statement

Year ended 31 December 2015

Operating environment

In 2015 the Company continued to operate in a challenging environment with high volatility in the crude oil market price at an average level of US$52 per barrel (2014: US$98) as well as high volatility in the Russian FOREX market. Domestic prices for light oil products ranged from US$38 to US$95 per barrel (2014: US$61 to US$155).

Operating Results

 
                                                 Year ended 
 US$'000                                         31 December 
                                            ------------------- 
                                                2015       2014 
------------------------------------------  --------  --------- 
 
 Gross revenues before excise and 
  export duties                               31,429     58,204 
 Net revenues after excise, export 
  duties and VAT                              27,213     44,481 
 Gross profit                                  7,115      8,704 
 Operating profit                              3,337      1,170 
 Normalised management EBITDA (unaudited)      7,743      8,103 
 Total net finance expense                   (7,590)   (17,271) 
 Loss for the year                           (4,055)   (13,699) 
------------------------------------------  --------  --------- 
 
 
                                 Year ended 
 Production                      31 December 
                             ------------------ 
                                 2015      2014 
---------------------------  --------  -------- 
 
 Petrosakh bbls               421,726   421,350 
 Arcticneft bbls              253,592   240,865 
 Petrosakh BOPD (average)       1,155     1,154 
 Arcticneft BOPD (average)        695       660 
 

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

 
                                              Year ended 
                                              31 December 
-----------------------------------------  ---------------- 
                                              2015     2014 
-----------------------------------------  -------  ------- 
 Crude oil                                  12,366   19,991 
   Export sales                             10,078   17,883 
   Domestic sales (Russian Federation)       2,288    2,108 
 Petroleum (refined) products - domestic 
  sales                                     18,868   37,890 
 Other sales                                   195      323 
-----------------------------------------  -------  ------- 
 Total gross revenues before excise 
  and export duties                         31,429   58,204 
-----------------------------------------  -------  ------- 
 

In 2015, total gross revenues decreased by US$26.8 million caused by a US$18.8 million decrease in gross revenue on the local market and a US$7.8 million from export shipment. A 47% decrease in gross revenue on the local market was a result of 59% average devaluation of Russian Rouble vs US dollar. This was partly offset by 10% increase in refined products prices in Russian Rouble equivalent, which was also offset by a decrease in sales volume of 22% due to the fire that occurred at the Petrosakh refinery at the beginning of the year. A 44% decrease in gross revenue from export shipment resulted from a 46% decrease in crude oil market price (2015: US$46 per bbl, vs 2014: US$86 per bbl.). This was also partially offset by a 5% increase in the volume shipped in 2015, as well 69% decrease of export duty rate for the period of shipment from Arcticneft.

Relatively low world oil prices and foreign exchange rates in 2015 led to a decrease in average net back prices, both for crude oil export and domestic sales of petroleum (refined) products. A decrease in average net back prices for petroleum (refined) products was partly offset by 26.4% decrease in excise rates for gasoline in 2015 in Rouble equivalent. Net back for sales is defined as gross product sales minus VAT, export duty, transportation costs, excise tax and refining costs.

Summary table: Net backs (US$/bbl)

 
                                              Year ended 
                                              31 December 
-----------------------------------------  --------------- 
                                              2015    2014 
-----------------------------------------  -------  ------ 
 Crude oil                                   34.02   40.90 
   Export sales                              31.65   38.32 
   Domestic sales (Russian Federation)       43.97   54.98 
 Petroleum (refined) products - domestic 
  sales                                      51.06   65.26 
 Other sales                                     -       - 
-----------------------------------------  -------  ------ 
 

Gross profit (net revenues less cost of sales) in 2015 decreased by 18% to US$7.1 million from a profit of US$8.7 million in 2014. The main drivers for this decrease were lower netbacks and the decline of sales volumes.

Cost of sales in 2015 totalled US$20.1 million as compared with US$35.8 million in 2014 of which US$4.6 million and US$6.2 million respectively represented non-cash items, principally depreciation, amortisation and depletion. The decrease in operating costs is mainly explained by exchange rate fluctuation. In addition, and despite the level of inflation of 13% in Russia over 2015, the Company managed to decrease its operating costs in Russian Rouble equivalent by 8.2% (adjusted for 1.9% production increase and 9.6% unified production tax increase) when compared with that achieved in 2014.

Selling, general and administrative expenses decreased during 2015 to US$3.9 million from US$8.7 million in 2014. The Company continued to demonstrate an average decrease in Russian Rouble denominated SG&A cost of 5% in 2015 when compared with 2014.

Professional and consultancy fees incurred were mainly denominated in US dollars and represented a significant portion of the previous total SG&A costs. A material amount of such fees in 2014 were due to the requisitioned EGM, non-recurrent expenses relating to legal action and the criminal investigation of the ADRA and Vyatcheslav Rovneiko in Cyprus and Russia and the severance payment to the former CEO of the Company, Alexei Maximov. At the end of 2014 the Company had settled all outstanding litigation and pending or threatened disputes and this resulted in a US$2.2 million decrease in SG&A cost in 2015.

Net finance expenses during 2015 were US$7.6 million (2014: US$17.3 million). Net finance expenses for the period primarily consisted of exchange rate movements from the strengthening of US$ vs the Russian Rouble in 2015.

Net finance costs in both 2015 and 2014 resulted in a net loss for the year attributable to shareholders of US$4.1 million and US$13.6 million respectively. Without the foreign currency loss of US$7.2 million in 2015 and US$17.7 million in 2014, profit before income tax for the year would have been US$2.9 million in 2015 (2014: US$1.6 million).

The decrease in sales volumes and net backs in 2015 largely offset by stable Rouble denominated costs and a decrease in US$ denominated G&A resulted in a decrease in consolidated normalised management EBITDA of US$0.4 million to US$7.7 million in 2015, compared with US$8.1 million in 2014. EBITDA margins were 28.5% and 18.2% respectively in 2015 and 2014.

Management EBITDA (US$'000) - Unaudited

 
                                                  Year ended 
                                                  31 December 
-------------------------------------------  ------------------- 
                                                 2015       2014 
-------------------------------------------  --------  --------- 
 (Loss) for the year                          (4,055)   (13,699) 
 
       Income tax (benefit)                     (198)    (2,402) 
       Net interest and foreign currency 
        loss                                    7,590     17,417 
       Depreciation, depletion and 
        amortisation                            4.329      6,473 
-------------------------------------------  --------  --------- 
       Total non-cash expenses                 11,721     21,342 
 
       Charge of bad debt provision                 -        913 
       Charge/(release) of unused 
        vacation provision                         50      (437) 
       Other non-recurrent (income)/losses         27      (162) 
-------------------------------------------  --------  --------- 
       Total non-recurrent and non-cash 
        items                                     941        460 
 
   Normalised EBITDA                            7,743      8,103 
-------------------------------------------  --------  --------- 
 
 

Net debt position

As at 31 December 2015, the Company had net debt of US$2.2 million (calculated as long-term and short-term debt less cash in bank and less loans issued). As at 31 December 2014, the Company had net cash of US$4.4 million.

As at 31 December 2015, the total borrowing of the Company was US$3.9 million, including a US$2.2 million 18 month revolving credit facility from the Sakhalin branch of OJSC Sberbank of Russia, plus US$1.7 million of debt which was acquired with two private Russian companies, RK-Oil and BVN Oil.

As at 31 December 2014 the Company was debt free.

Operational update

Petrosakh

In 2015 completed the drilling and testing of two wells: # 112 and # 54. These wells have enabled the subsidiary to keep production in 2015 broadly stable at the same level as 2014. At the end of 2015 Petrosakh commenced the drilling of well # 109. Unfortunately, due to difficult geological conditions, Petrosakh has continued to experience problems with well # 109, which has started to produce modest amounts of oil, but needs further intervention to reduce high pressure water from deeper horizons flowing to the surface.

The Board has decided to defer drilling of additional wells at Petrosakh until the completion of further geological investigations, and will instead focus on minimising the natural decline in production and exploring new ways of increasing output.

Downstream

Petrosakh continues to refine and sell 100% of its crude oil production to a highly competitive local refined products market.

Due to the fire that occurred at the Petrosakh refinery at the beginning of the year, the Company was forced to stop the production of oil products for a period of time. This led to a reduction in processing volumes during January and February 2015, resulting in decreased sales volume and increased stock. At the end of the reporting period the Company had 49,429 barrels of crude oil and 30,557 barrels of refined product in stock (2014: 6,193 bbls and 16,758 bbls respectively).

Downstream strategy of the Company is concentrated now on the following areas:

-- Follow a flexible pricing policy and a rational use of the competitive advantages that have allowed the Company to increase its customer base

-- Keep net backs on the sales of oil and oil products stable by decreasing selling expenses, concentrating on saving in storage and transport services and involvement in small wholesale and retail markets

   --     Increase the production yield via equipment upgrades and the use of new additives 
   --     Find new market niches, both on the island and neighbouring regions 

Arcticneft

During the reporting period the main efforts of the Company continued be a focus on minimising the natural decline in production through workovers. During the period the Company perforated, re-entered and performed acid stimulation of seven wells in total. This resulted in a 5.3% increase in Arcticneft's production in 2015. These workovers have proven effective and the Company plans to continue this approach, which the Board believes should enable production levels to be maintained.

In 2015 the Company was granted an additional license by the Russian regulatory authorities that expanded the boundaries of its license area at Arcticneft, which has added 10.3 million barrels of reserves ABC1 (equivalent to 2P).

The tanker is planned to be loaded and shipped in mid-July, but may be deferred until late in August, as we negotiate shipping arrangements.

Taxation

Following the changes adopted by the Russian government at the end of 2014, there will be a gradual increase in Mineral Extraction Tax, combined with a simultaneous decrease in Export Duty and Excise Tax over the next three years. An additional set of changes in the Russian tax legislation was approved at the end of 2015 and in the first quarter of 2016.

The main changes are the following:

   -      Starting in 2016, decreases in Export Duty have been frozen 

- At the same time the Excise Tax for EURO - IV gasoline was increased twice in 2016, by a total of 79.5% starting from the second quarter of 2016

   -      Several additional diesel fractions are now subject to Excise Tax. 

The Board anticipates that the new changes in the tax legislation will increase the tax burden on the Company. It is also clear that the development of oil fields in Russia now requires a higher net return after taxes.

Borrowings

In May 2015 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 Company received US$6.0 million under the agreement. The loan, including the accrued interest, was fully repaid in October 2015 as a result of the non-cash settlement transactions involving trade receivables from crude oil sales to Petraco.

In June 2015 Petrosakh entered into an 18 month revolving credit facility with the Sakhalin branch of OJSC Sberbank of Russia, under which Sberbank will provide 300 million Russian Roubles via several tranches to Petrosakh for working capital financing.

On 19 November 2015 the Group acquired two private Russian companies, OOO RK-Oil and OOO BVN Oil. These companies have long-term and short-term borrowings totalling US$1.8 million, which include US$1.7 million loans from Transnational Bank which are due for repayment from November 2018 to January 2019. In April 2015 Transnational Bank lost its Central Bank of Russia license.

Post year end acquisition activity

In June 2016, the Company 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. The licence, with an area of 28.8 sq. kms, was the subject of an earlier exploration and appraisal programme in the 1970s, followed by additional seismic work done in the middle of 1990s and 2007. During these periods two exploratory and six appraisal wells were drilled. Russian State Registered reserves C1 plus C2, equivalent to 2P (proven and probable), on the South Dagi license area are 17.7 million barrels, with C3 or possible reserves of 9.0 million barrels. At shallow levels, the oil is relatively heavy (23.5 - 25.5degAPI), with light oil (36.5 - 37.5degAPI), similar to the oil at the Company's Petrosakh operation, at lower horizons. The auction bid price was Russian Roubles 134.6 million, equivalent to US$2.1 million, and thus approximately 12 cents US per barrel of 2P reserves.

The Company's plan is to design and seek approval for a Development Plan for the South Dagi license with the official authorities, which is expected to involve a drilling program with the objective of producing up to 2,000 bbls/day over the next five years. The oil from South Dagi will be transported by road tanker to the Company's refinery at Petrosakh, a distance of 400 kms, increasing the utilisation rate of the refinery, which will not need additional investment to process both the heavy and light oils produced at South Dagi. The payment for the South Dagi licence was funded from the Company's existing capital resources, while its development will be financed on a project basis with a loan from local banks, which is being negotiated.

It remains the Company's intention to have a reserve report prepared by a Competent Person later in 2016.

Strategy

Our strategy is to:

-- Continue workovers 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 

-- 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 remains confident that with this low risk approach, we will be in a strong position to grow the Company as conditions in the oil markets inevitably adjust.

Leonid Dyachenko

Interim Chief Executive Officer

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