RNS Number : 1648A
Urals Energy Public Company Limited
25 September 2015

Press Release 25 September 2015

Urals Energy Public Company Limited

("Urals Energy" or the "Company")

2015 Half Year Results

Urals Energy P C L (A I M: UEN ), the independent explora on and produc on company with opera ons in Russia, is pleased to announce its half-year results for the six months ended 30 June 2015.

Operational highlights

Total production at Arcticneft during the period reached 124,697 barrels (H1-2014:
118,958 barrels)

Total production at Petrosakh during theperiod reached 196,890 barrels (H1-2014:
210,435 barrels)

Current daily production at Arcticneft is 716 BOPD, 4% higher than the average of 689
BOPD for the six months ended 30 June 2015

Current daily production at Petrosakh is 1,110 BOPD compared with an average of
1,088 BOPD for the six months ended 30 June 2015

In June 2015 the Company completed drilling of well 112 at Petrosakh, resulting in the daily production rate stabilizing in Petrosakh

In June 2015 the Company completed the installation and testing of new
control equipment in the Petrosakh refinery after theaccident which occurred at the beginning of the year

In January 2015 the Company signed a comprehensive settlement agreement with
Mr V Rovneiko, a former Director of the Company, on all outstanding litigation and pending or threatened disputes. This resulted in a material decrease in consulting services costs in the period

Financial highlights

· Posi ve net working capital posi on at 30 J une 2015 of US $3.1 million (30 December

2014: US$1.6 million)

· I n May 2015 the Company and its subsidiary Petrosakh entered into a short-term loan agreement with Petraco O il Company Limited ("Petraco"). Under the terms of this agreement, Petraco has advanced the Company US $6.0 million and the Board expect to repay the loan with the proceeds of the S eptember 2015 A rc cneA tanker shipment (expected to be received shortly). I n addi on the Company has entered into an 18 month revolving credit facility with the S akhalin branch of OJ S C S berbank of Russia, under which S berbank will provide, by way of several tranches, the sum of

300 million Russian Roubles. The loans are being used by the Company to both progress its 2015 CAPEX plan and as working capital financing

· Gross profit reduced by 45% to US$2.0 million (H1-2014: US$3.5 million)

· Operating loss decreased to US$0.1 million for the period (H1-2014: US$0.4 million)

· Loss for the period of US$0.1 million (H1-2014: US$1.2 million)

· EBITDA* decreased to US$1.3 million from US$3.3 million in H1 -2014

· Con nuous successful implementa on of cost reduc on programme and effec ve cost management in the period allowed the Company to decrease the opera ng costs and SG&A costs in Russian Rouble equivalent by 8% and 10% respectively

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

Post-period end and outlook

· O n 1 S eptember the planned annual tanker shipment for export from A rc cneA was successfully completed. The Company shipped 217,282 bbls (2014: 207,940 bbls). P reparatory maintenance work and changing the ming of the shipment allowed the Company to complete the shipment in less than four days without any demurrage charges. Payment for the tanker shipment is expected to be received shortly

· I n J uly 2015 the Company commenced drilling of well 54. The target depth has been

reached and the results of this drilling are expected shortly

· The Company successfully con nues to ra onalise its marke ng policy. I n an cipa on of the winter period Petrosakh has rented several tanks near Yuzhno - S akhalinsk and started small wholesales ac vity that will increase net backs by at least 5 %

For further information, please contact: Urals Energy Public Company Limited

Andrew Shrager, Chairman
Leonid Dyachenko, Interim Chief Executive Officer

- Ends -

Tel: +7 495 795 0300
Sergey Uzornikov, Chief Financial Officer www.uralsenergy.com

Allenby Capital Limited

Nominated Adviser and Broker

Nick Naylor / Alex Brearley Tel: +44 (0) 20 3328 5656 www.allenbycapital.com

Media enquiries: Abchurch

Quincy Allan Tel: +44 (0) 20 7398 7710 [email protected]www.abchurch-group.com
The accounts for the six months ended 30 J une 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

Operating environment

The six months ended 30 J une 2015 was a challenging period for the Company, characterised by con nuing high vola lity in the crude oil market price at an average level of US $58 per barrel (H1-2014: US $109) as well as high vola lity in the Russian FO R EX market. Domes c prices for light oil products ranged from US $82 to US $106 per barrel (H1-2014: US$113 to US$137).
Due to the fire that occurred at the Petrosakh refinery at the beginning of the year, the Company was forced to stop the produc on of oil products for a period of me. This led to a reduc on in processing volumes during J anuary and February 2015, resul ng in decreased sales volume and increasing stock. At the end of the repor ng period the Company had 26,985 barrels of crude oil and 52,905 barrels of refined product in stock (H1-2014: 16,680 bbls and 48,735 bbls respectively). Subsequently the refinery has recommenced production.
There were no deliveries of crude oil exported from A rc cneA during the repor ng period, resul ng in 182,885 barrels of commercial crude oil that remained in stock. The tanker shipment from A rc cneA was completed at the beginning of September 2015, payment from the shipment is expected to be received shortly.

Operating Results

US$'000

Period ended

30 June

2015 2014

Gross revenues before excise and export duties 7,715 18,909
Net revenues after excise, export duties and VAT 7,214 16,605
Gross profit 1,950 3,531
Operating profit (57) (438)
Normalised management EBITDA 1,323 3,306
Total net finance (expense)/benefits 282 (715)

(Loss) / profit for the year (48) (1,167)

Production

Period ended

30 June

2015 2014

Petrosakh bbls 196,890 210,435
Arcticneft bbls 124,697 118,958
Petrosakh BOPD (average) 1,088 1,163
Arcticneft BOPD (average) 689 660

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

Period ended

30 June

2015 2014

Crude oil 1,337 1,236
Export sales - -
Domestic sales (Russian Federation) 1,337 1,236
Petroleum (refined) products - domestic sales 6,257 17,503

Other sales 121 170

Total gross revenues before excise and export duties 7,715 18,909

For the six months ended 30 J une 2015, total gross revenues decreased by US $11.2 millionas a result of a decrease of sales volumes to 133,034 barrels for the six months ended 30 J une 2015 (H1-2014: 209,564) and a 39% average devalua on of Russian Rouble vs US dollar. These nega ve factors were partly offset by a 5% average increase in refined products prices in Russian Rouble equivalent.
High vola lity in crude oil prices and FO R EX rates during the repor ng period led to a decrease in average net back prices for domes c sales of petroleum (refined) products. At the same me a 26% decrease in excise rate for gasoline in Russian Rouble equivalent and slight increase in the prices had a posi ve effect on net back for refined products. N et back for domes c product sales is defined as gross product sales minus VAT, transporta on costs, excise tax and refining costs.

Summary table: Net backs (US$/bbl)

Period ended

30 June

2015 2014

Crude oil 46.43 58.30
Export sales - -
Domestic sales (Russian Federation) 46.43 58.30
Petroleum (refined) products - domestic sales 49.25 65.41

Other sales - -

Gross profit (net revenues less cost of sales) for the first half of 2015 decreased 45% to US $2.0 million (H1-2014: US $3.5
million). The main drivers for this decrease were the decline of sales volumes and the lower netbacks.
Cost of sales for the six months ended 30 J une 2015 totalled US $5.3 million as compared with US $13.1 million for the six months ended 30 J une 2014 of which US $2.1 million and US $3.8 million respec vely represented non-cash items, principally deprecia on, amor sa on and deple on. The decrease in opera ng costs was mainly due to exchange rate fluctua on. However, it was also as a result of the Company decreasing its opera ng costs in Russian Rouble equivalent by 8% (adjusted for 2.5% production decrease and 11% unified production tax increase) compared with that achieved for the six months ended 30 J une 2014. This was despite the deprecia on of the Russian Rouble and an official inflation level around 16% (1H-2015 vs 1H-2014).
S elling, general and administra ve expenses decreased during the first half of 2015 by US $2.0 million to US $1.9 million (H1-2014: US $3.8 million). A part from Russian Rouble deprecia on, the Company achieved an average decrease in Russian Rouble denominated S G&A cost in the repor ng period in the amount of10% compared with the previous period. P rofessional and consultancy fees are mainly denominated in US dollars and represent quite a significant por on of the total S G&A costs. A material amount of the fees in 2014 were represented byprofessional fees related to the requisi oned EGM, and non-recurrent expenses rela ng to legal ac on and the criminal inves ga on of the A D R A and Vyatcheslav Rovneiko in Cyprus and Russia. At the end of 2014 the Company seQled all outstanding litigation and pending or threatened disputes and this resulted in a US$0.6 million decrease in SG&A cost.
The net finance income for the first half of 2015 was US $0.3 million (H1-2014: net finance cost of US $0.7 million). N et finance income for the period primarily consisted of exchange rate movements caused by a slight strengthening in the first half of 2015 of the US$ vs the Russian Rouble.
The decrease in sales volumes and net backs in the six months ended 30 J une 2015 resulted in a consolidated normalised management EB I TDA decrease of US $2.0 million to US $1.3 million for the first half of 2015, compared with US$3.3 million in for the first half of 2014, with EBITDA margins of 18.3% and 19.9% respectively.

Management EBITDA (US$'000) - Unaudited

Period ended

30 June

2015 2014

(Loss) for the year (48) (1,167)

Income tax (charge) 273 14
Net interest and foreign currency (gain)/loss (282) 715

Depreciation, depletion and amortisation 1,232 2,803
Total non-cash expenses 1,223 3,532
Charge of bad debt provision - 389

Other non-recurrent (income)/losses 148 552
Total non-recurrent and non-cash items 148 941

Normalised EBITDA 1,323 3,306

Net debt Position

A s at 30 J une 2015, the Company had net debt of US $4.9 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.
I n May 2015 the Company received a loan of US $6.0 million from Petraco. I n J une 2015 it also received the first tranche of US $1.3 million (R R$70 million) of a 300 million Russian Roubles 18 month revolving credit facility from the S akhalin branch of OJSC Sberbank of Russia.

Operational update

Petrosakh

The Company completed the drilling and tes ng of well #112 in J uly 2015. Due to difficult geological condi ons, well #
112 has not yet achieved the final expected produc on rate. However, me this lower volume of oil well gas received from the well allowed for an increase in reservoir pressure resul ng in an improved produc on rate from exis ng wells.
The Company commenced the drilling of well #54 in J uly 2015. This well is now at the final stage of comple on and testing. The Company is planning to complete the drilling of well #54 and start to drill a third well by the end of 2015.
During the first half 2015 the Company con nued its focus on op mising the cost structure at Petrosakh. During the first stage, Management's main efforts were concentrated on transport and storage services. This included, replacement of an external contractor through the purchase of Company owned fuel trucks resulted in a significant reduction in these costs.

Downstream

Petrosakh con nues to refine and sell 100% of its crude oil produc on to a highly compe ve local refined products market.
Despite the price stability and even some decline in the refined product prices on the local market during the repor ng period, the flexible pricing policy allowed the Company to keep Russian Rouble net backs on the sales of oil and oil products stable. A lthough US dollar net backs decreased during the repor ng period, the Russian Rouble net back increased by 5% adjusted for a decrease in Excise rate.
Оn 9 J anuary 2015 a fire occurred at the Petrosakh refinery. The fire was caused by an accident which occurred during adverse weather condi ons, and electrical control equipment was damaged. This accident did not have a significant impact on the refining ac vity of Petrosakh. The plant was out of opera on for approximately a month and a half and was brought back into opera on via a manual regime. The Company finished the installa on of replacement automated equipment in July 2015, without any material effect on the production process.
At the same me the decrease in refining volumes in J anuary - February 2015, which is the most favorable period in terms of demand, led to the short-term loss of some customers, resul ng in dropping sales volume and increasing stock. At present the Company has stabilised the situa on and even increased its customer base by aQrac ng smaller customers, participating in tenders and developing small wholesale activity.

Arcticneft

Current production at Arcticneft is stable and stands at 716 BOPD.
Due to the weakness of the oil markets the Company decided to focus on minimising the natural decline in produc on through workovers and re-entering old exis ng wells. During the period the Company perforated, re-entered and performed acid s mula on of seven wells in total. This resulted in the stabilision of Arcticneft and the produc on of an addi onal 56 bbls per day when compared to the average level of produc on during the six months ended 30 J une
2014.
A rc cneA is in the final stage of the working with the regulatory authori es to expand the boundaries of the license area and update the scheme for the development of the oil field. The expected me of comple on is the fourth quarter of 2015.

Borrowings

I n May 2014 the Company entered into a pre-export short-term loan finance arrangement with Petraco O il Company Limited ("Petraco") under which Petraco has advanced the sum of US $6.0 million to the Company ahead of its an cipated A ugust 2015 tanker shipment from A rc cneA. The proceeds of the loan were used by the Company for working capital financing of A rc cneA. The loan, including the accrued interest, will be fully repaid via non-cash settlement transactions against trade receivables due in respect of crude oil sales to Petraco in September 2015.
I n J une 2015 Petrosakh entered into an 18 month revolving credit facility with the S akhalin branch of OJ S C S berbank of Russia under which S berbank will provide, by way of several tranches, the sum of 300 million Russian Roubles to Petrosakh for working capital financing.
O wing to the uncertainty about the direc on of the oil price, even though there is significant benefit from the Russian Rouble exchange rate offseUng much of the recent fall in the price, the Board will follow a cau ous policy to maintain a cash positive position in the coming months.

Strategy

Our strategy is to:

· Continue work overs at our two operations so as to maintain production levels as far as possible

· Enhance refinery margins at Petrosakh by adjusting product mix for local sales of products, and preparing to be

able to import crude to increase refinery throughputs

· Seeking economies where possible to offset Russian Rouble cost inflation

· Delaying major capex to exploit undeveloped reserves at A rc cneA un l there is more confidence in the oil market

· Look to acquire exploration licences for modest consideration and limited initial spending obligations

· A ssessing the poten al to secure long term funding so that we are able to proceed with development of the

Arcticneft reserves and drilling on the new licences we are seeking, as soon as market conditions allow
The Board remains confident that with this low risk approach, we will be in a strong posi on to grow the Company as conditions in the Oil markets inevitably adjust.

Outlook

At A rc cneA, the Company will con nue to implement the workover programme on an addi onal eight wells in the second half of 2015. The aim of these programmes is to keep produc on at A rc cneA at an average of 700 to 720 bbls/day by the end of 2015.
At Petrosakh, with the comple on of well #54, the Company will evaluate the results and take an economically justified decision on drilling well #61.
Having completed the evalua on of the cost structure at Petrosakh, the Company decided that increasing capital expenditure, with a four to six months payback period, will allow Petrosakh to avoid using services provided at unreasonably high monopolis c prices by external providers and consequently op mise its opera ng and transporta on expenses. The Company started this programme during the first half of 2015 and will expect to finalise it by the end of the year.
I n the downstream area at Petrosakh the Company is now concentra ng on poten al technical improvements of the refinery, which will allow increasing oil conversion depth at rela vely reasonable cost. I n parallel the Company is actively looking for the opportunity to load the capacity of the refinery by external crude oil shipment.
Leonid Dyachenko
Interim Chief Executive Officer
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