Latest Results

2018 Half Year Results

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.

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 2018.

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Key Points of the Company's activity for the six months ended 30 June 2018:

  • Developed reserves for continuing operations and potential reserves for new developments assessed at a total of 178 million barrels of 2P by Blackwatch Petroleum Services
  • Successful drilling of South Dagi workover well No 7 and subsequent potential discovery at first exploration well No1, aimed at gradual offset of natural decline of Petrosak production, though this has now stabilised through additional work overs at approx 900 bbls/day
  • Investment in the main port of Sakhalin Island, aimed at improving margins for fuel oil and providing extra storage for Petrosak production
  • Production at Articneft continues at approx 900 bbls/d, but first tanker loading of the year delayed until after the interim period end
  • Profits and cash flow for the period affected by the decline in Petrosak production, increased Russian production taxes and exchange rate movements, as well as the delay in the sailing of the first tanker loading, affecting revenues and stock levels at period end
  • Board confident for the year as a whole, and has confirmed intention to recommend to shareholders at the AGM to be held in November a dividend for the year to 31 December 2017 that is equivalent to the first dividend paid last year

Key statistics for the six months ended 30 June 2018 compared with the same period in 2017:

  Six months ended 30 June 2017 Six months ended 30 June 2016 % change
       
Total production (barrels) 324,392 388,889 -17%
Gross revenue before excise and export duties US$13.1 m US$28.0 m -53%
Gross profit after excise, export duties and VAT US$ 1.0 m US$ 2.8m -64%
Operating profit/(loss) US$(1.4) m US$(0.2)m  
Normalised EBITDA (see definition below - non IFRS) US$1.1 m US$3.4 m -68%
Net profit/(loss) pre-tax and foreign exchange effects US$(2.2) m US$(0.9) m  
Profit/(loss) for the period US$(3.6) m US$(0.8) m  

Operational highlights

  • Total production at Arcticneft during the six months ended 30 June 2018 reached 156,227 barrels, including production of 53,424 from Arctic Oil Company Limited ("ANK") (H1-2017: 186,831 barrels, including ANK production of 55,691 barrels)
  • Total production at Petrosakh during the period reached 168,165 barrels (H1-2017: 202,058 barrels)
  • Current daily production at Arcticneft and Arctic Oil Company is 907 barrels of oil per day ("BOPD") compared with an average of 863 BOPD for the six months ended 30 June 2018
  • Current daily production at Petrosakh is 920 BOPD compared with an average of 929 BOPD for the six months ended 30 June 2018
  • In June 2018 Blackwatch Petroleum Services Ltd ("Blackwatch") completed their assessment of the Company's "Remaining Reserves and Resources Potential". As of 31 December 2017 the estimated net attributable Remaining Proved and Probable Reserves of the Company were 107.0 million barrels. Blackwatch have also recognised Prospective Resources at the Company's Ordymsky licence ("RK Oil") in the Komi Republic. Blackwatch estimated the Company's mean total 2P reserves to be approximately 178.0 million barrels
  • In June 2018 the Company has completed and tested a workover of an existing well located on the South Dagi licence area (Well 7). During well tests, the daily oil volumes achieved from Well 7 were approximately 225 bbls/day
  • In May 2018 the Company appointed Brandon Hill Capital Limited as the Group's Financial Adviser for the purposes of introducing strategic partners such as oilfield services companies and investors, with the aim of forming joint venture partnerships or other suitable structures, and/or raising capital for our development projects for Articneft and in Komi
  • In June 2018 the Company acquired a 23% voting interest in the Kholmsk commercial seaport, which is situated on the Western side of Sakhalin Island. The seaport has bunkering facilities to supply fuel oil to local fishing fleets and ferries, which are the main users of the seaport. The Company believes that the investment in the seaport will allow marketing its fuel oil directly to clients and therefore enhancing the margins of its bunker fuel sales operations. This investment will provide the Company with greater strategic flexibility in terms of storage capacity relating to both the importation and exportation of products from Sakhalin Island

Financial highlights

  • Gross profit (after excise, export duties and VAT) decreased by 64% to US$1.0 million (H1-2017: US$2.8 million)
  • Operating loss of US$1.4 million for the period (H1-2017: loss of US$0.2 million)
  • Net loss before income tax of US$4.0 million (H1-2017: loss of US$0.4 million). The increase in net loss before income tax was caused by exchange rate movements during the reporting period. Foreign currency loss represents 44% of the total amount of loss
  • Underlying net loss before income tax and foreign exchange effects of US$2.2 million (H1-2017: US$0.9 million)
  • EBITDA* decreased to US$1.1 million for the period from US$3.4 million for the six months ended 30 June 2017, a decrease of 68% with a simultaneous decrease in EBITDA margins from 15.3% to 9.9%
  • Negative net working capital position on 30 June 2018 of US$3.5 million (2017: negative US$1.8 million)
  • The Company finished the period with a net debt position of US$14.6 million (31 December 2017: US$7.1 million) with a year-on year basis Debt/EBITDA ratio of 3.4 as at 30 June 2018 (31 December 2017: Debt/EBITDA ratio 1.3)
  • On 31 January 2018 Petrosakh entered into a twelve-month revolving credit facility with the Sakhalin branch of PJSC Sberbank of Russia ("Sberbank") for a total amount of 300 million Russian Roubles (representing approximately US$5.2 million at prevailing exchange rates) available to Petrosakh for working capital financing. This loan replaced a previous loan which was settled in 2018
  • In May 2018, the Company and its subsidiary Arcticneft entered into a short-term loan agreement with Petraco Oil Company Limited ("Petraco"). Under the terms of this agreement, Petraco advanced the Company US$5.0 million as export shipment pre-financing. This indebtedness was repaid in August 2018

*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 July 2018, the Company successfully completed a tanker shipment of 158,191 barrels of crude oil from Arcticneft. The Company is planning to make a second tanker shipment later this year in beginning of November. The estimated volume to be shipped based on the current volume of crude left in stock and expected levels of production is around 20,000 tons (equivalent to 157,400 barrels)
  • Ahead of the anticipated November 2018 tanker shipment, in September the Company has entered into a pre-export short term loan finance arrangement with Petraco Oil Company Limited ("Petraco"), under which Petraco has advanced the sum of US$5.0 million to the Company
  • In August 2018, Arcticneft has settled indebtedness with Kamchatcomagroprombank in the amount of 175 million Russian Roubles (representing approximately US$2.8 million at prevailing exchange rates)
  • In August 2018, the Company finalized a merger of Arctic Oil Company (ANK) with Arcticneft. The process was initiated in the beginning of 2018 following reregistration of the ANK license
  • In September 2018, the drilling of the Group's planned exploration well (Well 1) at the South Dagi field on Sakhalin Island has reached the target depth of 2,207 meters. The casing of Well 1 has been completed and the next stage of the well's development is the testing of the discovered object layers, which has recently been delayed for a least two months

Mr Andrew Shrager, Chairman, commented: "The results for the first half of 2018 have been affected by a combination of lower production volumes as we see the continued natural decline of our production at Petrosak, increased production taxes, and having to hold large stocks valued just at cost, as our first tanker was not loaded until after the period end. Nevertheless, EBITDA was positive at over US$1 million, and even after some US$5 million of capital expenditure, our term debt position remains comfortable."

"The most important events of the period were the successful work over of well No 7 and the potential discovery well No 1 at South Dagi, which should progressively help to offset the decline at Petrosak. The acquisition of a shareholding in the most important port on Sakhalin Island is part of the strategy. The objective for this investment is to secure the future of our refinery at Petrosak, improving throughput and margins, which we expect to see over the coming months."

"We have initiated a plan that could allow us to acquire our own fracking fleet for Articneft and continue to investigate partnerships to develop our Komi reserves and resources."

"We remain confident that we can build a long term future for the Company, but believe that shareholders should share in our results, and so are pleased to confirm the intention to propose at the AGM in November that a dividend should be paid for the period to 31 December 2017 that is equivalent to last year's dividend."

 

Chief Executive Officer's Statement

Operating environment

The six months ended 30 June 2018 were characterised by continuing increases in crude oil prices in the market. During the period, oil prices averaged US$68 per barrel (H1-2017: US$52 per barrel) with the Russian Rouble devaluating on average by 2% compared with the same period in 2017. Domestic prices for oil products ranged over the period from US$50 to US$120 per barrel (H1-2017: US$37 to US$97 per barrel).

Operating Results

US$'000 Period ended
30 June
  2018 2017
     
Gross revenues before excise and export duties 13,086 27,989
Net revenues after excise, export duties and VAT 11,187 22,433
Gross profit 997 2,819
Operating (loss)/profit (1,438) (211)
Normalised management EBITDA 1,111 3,433
Total net finance (expense)/benefits (2,539) (212)
(Loss) / profit for the period (3,628) (759)

Production Period ended
30 June
  2018 2017
     
Petrosakh bbls 168,165 202,058
Arcticneft bbls 102,803 131,140
Arctic Oil Company bbls 53,424 55,691
Petrosakh BOPD (average) 929 1,116
Arcticneft BOPD (average) 568 725
Arctic Oil Company BOPD (average) 295 308

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

  Period ended
30 June
  2018 2017
Crude oil 676 11,065
   Export sales - 10,237
   Domestic sales (Russian Federation) 676 828
Petroleum (refined) products - domestic sales 12,401 16,842
Other sales 9 82
Total gross revenues before excise and export duties 13,086 27,989

For the six months ended 30 June 2018, total gross revenues decreased by US$14.9 million. This decrease was due to a US$4.7 million decrease in gross revenue form the local market and US$10.2 million of export revenue from Arcticneft as the first 2018 export shipment from Arcticneft was completed in July 2018, outside of the interim accounting reference period. A 26% decrease in gross revenues from the local market was the result of a 27% decrease in sales volumes, combined with a 4% average increase in refined products prices in Russian Rouble equivalent. The 2% average devaluation of the Russian Rouble versus the US Dollar was also a negative factor in terms of gross revenues during the period.

Stable net back prices for crude oil domestic sales are broadly in line with the 3% increase in domestic sales price and the 2% average devaluation of the Russian Rouble versus the US Dollar.

A 3% increase in net back prices for refined products during the six months ended 30 June 2018 is the result of a combination of a variety of trends, being: a 4% average increase in sales prices for refined products and decrease in refinery cost which was partially offset by a 9% increase of Excise Tax for gasoline and diesel fractions combined with the devaluation of the Russian Rouble. 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)

  Period ended
30 June
  2018 2017
Crude oil 48.64 32.07
   Export sales - 30.90
   Domestic sales (Russian Federation) 48.64 48.48
Petroleum (refined) products - domestic sales 52.63 51.24
     

Gross profit (net revenues less cost of sales) for the first half of 2018 decreased by 64% to US$1.0 million (H1-2017: US$2.8 million). The main driver for this decrease was the falling of sales volumes by 27% and the increase in cost of sales, mainly due to the higher Unified Production Tax which is linked to increased Brent crude oil prices as well as the FOREX rate (devaluation of the Russian Rouble).

Cost of sales for the six months ended 30 June 2018 totaled US$10.1 million, as compared with US$19.6 million for the six months ended 30 June 2017, of which US$3.1 million and US$3.2 million respectively represented non-cash items, principally depreciation, amortisation and depletion.

Without taking into consideration changes in finished goods (the difference between the cost of finished goods at the end and beginning of the period) the Company increased its operating costs in Russian Rouble equivalent by 8% compared with that during the first half of 2017. The increase of operating cost in Russian Rouble equivalent is a combination of:

  • a 30% increase in Unified Production Tax, which was caused by: a 1% legislative increase due to a change in the basis of the tax calculation, a 31% increase in average Brent oil price and the 2% devaluation of the Russian Rouble (with the last two indicators being inputs for the production tax rate calculation);
  • a 23% increase in the cost of materials caused by anextensive workover program at Arcticneft and the planned repair of the refinery at Petrosakh.
  • A 50% decrease in the cost of additive, caused by decreases in the volume of the refinery; and
  • a 25% decrease in the costs of oil treatment, storage and other services due to the absence of export shipment during the first half of 2018 from Arctic Oil Company.

Selling, general and administrative expenses decreased during the first half of 2018 to US$2.4 million from US$2.8 million during the same period of 2017. Apart from the Russian Rouble devaluation, the Company had an average decrease of 13% in Russian Rouble denominated selling, general and administrative costs in the period, as compared with the previous period. The main driver of this decrease was lower loading, transportation and storage expenses due to the decreased volume of sales from Petrosakh and the absence of an export shipment at Arcticneft during the reporting period. This decrease was mitigated by a 16% increase in employee cost.

The net finance expense for the first half of 2018 was US$(2.5) million (H1-2017: US$(0.2) million net finance income). This change was primarily driven by exchange rate movements caused by the devaluation of the Russian Rouble against the US Dollar in the first half of 2018 and the interest accrued on the loans in effect.

The decrease in sales volumes in the six months ended 30 June 2018 in combination with increases in excise tax and production tax expenses resulted in a consolidated normalised EBITDA of US$1.1 million, compared with US$3.4 million for the first half of 2017, which corresponded to EBITDA margins of 9.9% and 15.3% respectively.

Management EBITDA (US$'000) - Unaudited

  Period ended
30 June
  2018 2017
(Loss) for the period (3,596) (759)
     
  Income tax (charge) 2,539 336
  Net interest and foreign currency (gain)/loss (349) 212
  Depreciation, depletion and amortisation 2,485 3,246
  Total non-cash expenses 4,675 3,794
     
  Charge of bad debt provision    
  Other non-recurrent (income)/losses 32 398
  Total non-recurrent and non-cash items    
     
Normalised EBITDA 1,111 3,433

Net debt Position and Borrowings

As at 30 June 2018, the Company had net debt of US$14.6 million (calculated as long-term and short-term debt less cash in bank and less loans issued). As at 31 December 2017, the Company had net debt of US$7.1 million. As at 30 June 2017, the Company had net debt of US$12.2 million.

As at 30 June 2018, the total borrowing of the Company was US$18.1 million (2017: US$9.9 million), including: US$7.7 million of credit facilities from the Sakhalin branch of PJSC Sberbank of Russia, US$2.4 million of debt which was acquired with two private Russian companies, RK-Oil and BVN Oil, US$2.8 million of short term borrowings from Kamchatcomagroprombank and US$5.1 million of short term pre-financing received from Petraco Oil Company.

The loans from Kamchatcomagroprombank and Petraco Oil Company were repaid in August 2018.

Operational update

Petrosakh

During the period the Company continued its focus on minimising the natural decline in production on Okruzhnoe field. The natural decline in production is being addressed by the implementation of standard technological means, water injections and workovers.

After preparatory work the Company spudded its first well, a planned exploration well (Well 1), at the South Dagi field on Sakhalin Island. After delays due to the weather conditions and rig's mobilisation and operational set up, the Company commenced drilling during the reporting period. In September 2017 the well reached the target depth of 2,207 meters.

In parallel, in June 2018 the Company completed and tested a workover of an existing well located on the South Dagi licence area (Well 7). During well tests, the daily oil volumes achieved from Well 7 were approximately 225 bbls/day. However, as announced on 27 September 2018, the full testing of Well No 1, will be delayed for at least two months, due to a collector pipe becoming stuck in the well below 1,100 meters during the completion process. Removing this pipe will require special equipment that is manufactured and available in Russia, which is required to be brought to the Island.

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 nature of the refined products market has caused the Company to constantly reassess its marketing activity. The flexible pricing policy and rational use of the favourable competitive advantages allowed the Company to keep net backs on the sales of oil and oil products stable. During the reporting period the Company continues to work to increase the customer base in two main directions i.e. attracting smaller clients and more active participation in different tenders thus avoiding additional intermediaries.

During the navigation period, the Company continued to ship fuel oil by sea. This allowed the Company to be involved in bunkering activity which is highly profitable in this region, which added an additional 20% margin on these sales and decreased the Company's inventory stock of fuel oil.

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

Arcticneft

During the period, the main efforts of the Company continued be a focus on minimizing the natural decline in field production through workovers which were performed on seven wells.

In 2017 the Company decided to shift several wells to artificial oil lifting using jack pumps. A number of jack pumps were partially installed in 2017. During the first half of 2018 the Company actively work on completion of this work.

In 2017 the Company engaged Prokon, a geotechnical analysis company, to update the model for the development of the Peschanoozerskoye Field. The Company received detailed recommendations based on several scenarios in August 2018. After a final discussion with these consultants the Company intends to present a new development plan of Peschanoozerskoye Field to the official authorities in October 2018 for final approval. Following this approval the Company will apply to extend the period of licence which belonged previously to Arctic Oil Company and expired in 2019.

Leonid Dyachenko
Chief Executive Officer