RNS Number : 6269Q
Urals Energy Public Company Limited
19 June 2015

Press Release 19 June 2015

Urals Energy Public Company Limited ("Urals Energy" or the "Company") Final 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 audited financial results for the year ended 31 December 2014.
Leonid Dyachenko, I nterim Chief Execu ve O fficer, commented: "2014 has been a challenging year for Urals characterised by low oil prices and vola lity on the Russian FO R EX markets. With the Company effec vely debt free and the remaining corporate issues resolved during the period there is a strong platform for growth on which to build.
"The reserve assessment report prepared by Miller and Lents has given the Group further opportunity to develop our reserves through a series of work over programmes and the drilling of new wells. With our sound financial strength and desire to seek out suitable acquisitions the Board has reason to be optimistic for the future of Urals Energy."

Operational highlights

· Total production at Arcticneft reached 240,865 barrels (2013: 250,426 barrels)

· Total production at Petrosakh reached 421,350 barrels (2013: 470,415 barrels)

· Current daily production at Arcticneft is 720 BOPD 9% higher than an average of 660 BOPD for the twelve months ended 31 December 2014

· Current daily produc on at Petrosakh is 1,095 B O P D compared with an average of 1,154 BOPD for the twelve months ended 31 December 2014

· I n O ctober 2014 the Company successfully completed the shipment of

207,940 bbls of crude oil from Arcticneft (2013: 198,537 bbls)

· The Company issued a new reserve assessment report prepared by Miller and Lents. The reserves report was prepared in accordance with Petroleum Resources Management System (P R MS )and aggregate 2P reserves of the Group as at 1 January 2014 represent 46.3 million bbls

Financial highlights

· Gross profit reduced by 30% to US$8.7 million (2013: US$12.4 million)

· Operating profit of US$1.2 million for the period (2013: US$2.8 million)

· N et loss before income tax of US $16.1 million in 2014 (2013: net loss of

US $0.4 million) caused by exchange rate movements during both 2014 and
2013. Without the foreign currency loss US $17.7 million in 2014 and US $3.7 million in 2013, profit before income tax for the year would have decreased in 2014 by US$1.6 million

· EB I TDA * decreased to US $8.1 million from US $10.5 million in 2013, a decrease of 23%

· Posi ve net working capital posi on on 31 December 2014 of US $1.6 million

(2013: US$2.0 million)

· S uccessful implementa on of cost reduc on programme in the previous periods and effec ve cost management in 2014 allowed the Company to keep the opera ng costs in Rouble equivalent in line with the level achieved in 2013 and this resulted in a decrease in Rouble denominated SG&A costs in 2014 to the amount of 5%

· N et cash generated from opera ng ac vi es allowed the Company to seFle the outstanding loan received from Petraco O il Company Limited and

Petraco in 2014 and finish 2014 with a net cash posi on of US $4.4 million
(2013: net cash US$6.0 million)

*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

· In June 2015 the Company completed well 112 drilling at Petrosakh which is now at the stage of tes ng and comple on. Expected rate of produc on is around 110 bbls per day

· The annual planned tanker shipment for export from A rc cneG to Petraco is

expected in A ugust 2015. The Company decided to make the export shipment earlier this year due to bad weather restric ng tanker loading in the past (21
N ovember 2013). The es mated shipment based on current daily produc on is around 200,000 bbls

· The Company successfully con nues the work over program of re-entering

exis ng wells adopted in A rc cneG. Four wells which were previously out of opera on for several years were perforated. A s a result the current daily production in Arcticneft reached 720 bbls per day at a marginal incremental cost

· I n May 2014 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 both progress its C A P EX program and working capital financing

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 Tel: +44 (0) 20 3328 5656
Alex Price www.allenbycapital.com

Media enquiries: Abchurch

Henry Harrison-Topham / Quincy Allan Tel: +44 (0) 20 7398 7710 [email protected]www.abchurch-group.com
The accounts for the year ended 31 December 2014 will shortly be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20.

Interim Chief Executive Officer's Statement

2014 Financial

Operating Environment

2014 was characterised by high vola lity in the crude oil market price at an average level of US $98 per barrel (2013: US $109) as well as high vola lity on the Russian FO R EX marke.t Domes c prices for light oil products ranged from US $61 to US $155 per barrel(2013: US $100 to US $145). Despite this, the Company generated opera ng cash flow at a level sufficient to maintain its operation and comply with the license requirements on both fields.

Operating Results

US$'000

Year ended

31 December

2014 2013

Gross revenues before excise and export duties 58,204 64,844
Net revenues after excise, export duties and VAT 44,481 50,267
Gross profit 8,704 12,423
Operating profit 1,170 2,787
Normalised management EBITDA (unaudited) 8,103 10,501
Total net finance (expense)/benefits (17,271) (3,191)

(Loss) / profit for the year (13,699) (273)

Production

Year ended

31 December

2014 2013

Petrosakh bbls 421,350 470,415
Arcticneft bbls 240,865 250,426
Petrosakh BOPD (average) 1,154 1,289
Arcticneft BOPD (average) 660 686

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

Year ended

31 December

2014 2013

Crude oil 19,991 24,703
Export sales 17,883 21,607
Domestic sales (Russian Federation) 2,108 3,096
Petroleum (refined) products - domestic sales 37,890 39,802

Other sales 323 339

Total gross revenues before excise and export duties 58,204 64,844

I n 2014, total gross revenues decreased by US $6.6 million (caused by a US $2.9 million decrease in gross revenue on the local market and a US $3.7 million from export shipment). A 7% decrease in gross revenue on the localmarket with the stable volume of sales is a result of a 10% increase in refined products prices in Rouble equivalent offset by 21% average devalua on of Russian Rouble vs US dollar. A 17% decrease in gross revenue from export shipment resulted from a 21% decrease in crude oil market price (2014: US $86 per bbl, vs 2013: US $109 per bbl.) offset by a 5% increase in the volume shipped in 2014.
High vola lity in crude oil prices and FO R EX rates in 2014 led to a decrease in average net back prices both for crude oil export sales and for petroleum (refined) products domes c sales. More over an 11% indexa on of excise rates for gasoline in 2014 also partly had a nega ve effect on net back for refined products. N et back for domes c product sales
is defined as gross product sales minus VAT, transportation costs, excise tax and refining costs.

Summary table: Net backs (US$/bbl)

Year ended

31 December

2014 2013

Crude oil 40.90 53.91
Export sales 38.32 52.45
Domestic sales (Russian Federation) 54.98 59.62
Petroleum (refined) products - domestic sales 65.26 71.94

Other sales - -

Gross profit (net revenues less cost of sales) in 2014 decreased by 30% to US $8.7 million from a profit of US $12.4 million in 2013. The main driver of the decreased profit in 2014 was lower net backs.
Cost of sales in 2014 totalled US $35.8 million as compared with US $37.8 million in 2013 of which US $6.2 million and US $5.9 million respec vely represented non-cash items, principally deprecia on, amor sa on and deple on. The decrease in opera ng costs is mainly explained by exchange rate fluctua on. I n addi on, and despite the level of inflation almost doubling in 2014, the Company managed to keep the opera ng costs in Rouble equivalent in line with the level achieved in 2013 (increase in costs amounted to 0.9 %) as a result of the implementa on of strong monitoring procedures.
S elling, general and administra ve expenses decreased during 2014 by US $0.6 million to US $8.7 million from US $9.3 million in 2013. The Company demonstrated the average decrease in Rouble denominated S G&A cost in 2014 in the amount of 5% compared with 2013. P rofessional and consultancy fees are mainly denominated in US dollars and represent quite significant por on of the total S G&A costs. A material amount of the fees in 2014 as well as in 2013 are represented by professional fees related to the requisi oned EGM, and non-recurrent expenses related to legal ac on and a criminal inves ga on of the A D R A and Vyatcheslav Rovneiko in Cyprus and Russia. The US $0.1 million increase in 2014 compared with 2013 is caused by the services provided by Miller and Lents in the course of the new reserve assessment report prepara on. I ncrease in wages and salaries in 2014 is represented by severance payment to the former CEO of the Company, Alexei Maximov.
The net finance expenses during 2014 were US $17.3 million (2013: US $3.2 million). N et finance expenses for the period primarily consist of exchange rate movements caused by significant strengthening in 2014 of US $ vs Russian
Rouble.
I ncrease of net finance costs in 2014 resulted in a net loss for the year aFributable to shareholders of US $13.6 million
(2013: net loss of US $0.4million). Without the foreign currency loss of US $17.7 million in 2014 and US $3.7 million in
2013, profit before income tax for the year would represent US$1.6million in 2014 (2013: US$3.2 million).
The decrease in net backs and the decrease of cost of sales in 2014 resulted in a consolidated normalised management EB I TDA decrease of US $2.4 million to US $8.1 million in 2014 compared with US $10.5 million in 2013, with EB I TDA margins of 18.2% and 20.9% respectively.

Management EBITDA (US$'000) - Unaudited

Year ended

31 December

2014 2013

(Loss) for the year (13,699) (273)

Income tax (benefit) (2,402) (131) Net interest and foreign currency loss 17,417 3,191

Depreciation, depletion and amortisation 6,473 5,591
Total non-cash expenses 21,342 8,651
Charge of bad debt provision 913 990
Charge/(release) of unused vacation provision (437) 67

Other non-recurrent (income)/losses (162) 1,066
Total non-recurrent and non-cash items 460 2,123

Normalised EBITDA 8,103 10,501

Net debt Position

A s at 31 December 2014, the Company had net cash of US $4.4 million (2013 net cash was US $6.0 million) calculated as long-term and short-term debt less cash in bank and less loans issued.
As at 31 December 2014 as well as at 31 December 2013 the Company was debt free.

Operational update

Petrosakh

I n 2014 the Company con nued its focus on minimising natural decline in produc on and exploring new ways of increasing output. Unfortunately, as a result of difficult geological condi ons, Petrosakh con nued to experience problems with drilling new wells. A Ger delays in drilling of well #112 the Company finished the drilling in J une 2015. At the moment well #112 is at the stage of tes ng and comple on. Expected rate of produc on is around 110 bbls per day.
A Ger current repair and maintenance of the rig and evalua on of the main problems during previous drilling opera ons, the Company is planning to start the drilling of a new well #54 in J uly 2015. A ll necessary materials and equipment are in place. At the moment the Company is planning to complete the drilling of well #54 and start to drill the third well by the end of 2015.

Downstream

Petrosakh con nues to refine and sell 100% of its crude oil produc on domes cally. Being the only Company on the island which has a refinery, Urals Energy continues to work in a highly competitive refined products market.
The flexible pricing policy and ra onal use of the favourable compe ve advantages allowed the Company to keep net backs on the sales of oil and oil products stable. A lthough US $ net backs decreased in 2014 the Rouble net back increased by 10% and this is in spite of the increase in excise rate of 5% from January 2014.
I n 2014 the Company started to use a new addi ve for gasoline produc on. The new addi ve led to increase in the yield of light oil products at a lower cost (decrease in cost in 2014 represents 15% compared to 2013).
Оn 9 J anuary 2015 a fire occurred at Petrosakh refinery caused by an accident which occurred during adverse weather conditions. Mainly 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 one month and was brought back into opera on via a manual regime. The Company expects to finish the installa on of replacement automated equipment in July 2015 without any effect on the production process.
The Company con nues to work to increase the customer base in two main direc ons i.e. aFrac ng smaller clients and more active participation in different tenders thus avoiding additional intermediaries.
The highly compe ve refined products market on the island has caused the Company to reassess its marke ng ac vity. The two main areas under evalua on now are the possible rental of tanks nearby Yuzhno - S akhalinsk and the acquisi on of a petrol sta on. This is a new market for the Company and management believe that the steps described above will allow the Company to take new niches, small wholesale and retail and increase net backs.

Arcticneft

Current production at Arcticneft is stable and stands at 720 BOPD.
During the repor ng period the main efforts of the Company were focused on minimising the natural decline in produc on through workovers. The target of the programme is to perforate new layers. At the end of 2014 the Company put six temporary abandoned wells into opera on as a first step. The es mated level of produc on per well subject to successful workover is up to 50 bbls per day. The aim of these programmes is to bring produc on at Arcticneft up to an average of 700 to 720 bbls/day by the end of 2015.
At the moment A rc cneG is working with the official authori es on expanding the boundaries of the license area with subsequent update of the technological scheme of field development. The expected me of finalisa on is September 2015.
Unlike previous years the tanker is planned to be loaded and shipped in A ugust 2015. Having analysed the previous shipment(s) the Company came to the conclusion that an earlier shipment is more favourable both from a weather conditions point of view as well as expected market conjuncture.

Taxation

At the end of 2014 the Russian government adopted a set of changes in the tax regime for oil and gas companies. The new changes provide for the gradual increase of Mineral Extrac on Tax with a simultaneous decrease in Export Duty and Excise Tax for the nearest three years. The Company evaluated the influence of these changes on the financial posi on of its subsidiaries. Following considera on of varying scenarios, management believes that the new changes will not have a material nega ve impact on A rc cneG as an increase in in Mineral Extrac on Tax is mi gated by a decrease in Export Duty. At Petrosakh given that only 28% of refined products in are subject to Excise, we an cipate that the new changes in the tax legislation will increase the tax burden on the Company.

Petraco loan

I n J une 2014 the Company entered into a short-term loan agreement with Petraco under which Petraco agreed to advance the sum of up to US $7.6 million to the Company. The Company received US $3.8 million under the agreement and the loan including the accrued interest was fully repaid as a result of the non-cash seFlement transac ons with trade receivables due to crude oil sales to Petraco in December 2014.

ADRA and settlements with Mr Rovneiko

I n O ctober 2013 the Company received a no fica on informing it of the existence of a "Debt Repayment A greement" (the "A lleged A greement") claiming that the Company was liable to pay a party the sum of the US $41,652,000 by 15
December 2013, representing collateral allegedly provided by the Company in relation to the party's 8,010,000 pledged shares to F infund. O n 26 December 2014 the Company signed a comprehensive seFlement agreement with Mr Vyatcheslav Rovneiko, a former Director of the Company, on all outstanding li ga on and pending or threatened disputes. A ll par es to the dispute are pleased to bring it, and all other related or unrelated allega ons, to a full and final resolu on. A s part of the overall seFlement, Mr Vyatcheslav Rovneiko agreed to withdraw his claim for US $41.7 million arising out of the disputed Alleged Agreement.

Outlook

Operationally 2014 was been a year of some important improvements:
At A rc cneG, the work over programme led to an increase in daily produc on to 720 bbls/d for a marginal increased cost. We have developed a plan to bring forward significant undeveloped proven reserves confirmed by the Miller & Lens report completed in January 2014, but this does require a more stable environment and improved oil price.
At Petrosakh, with the comple on of well #112, we an cipate stabilising produc on at an average of approximately
1,100 bbl/d. We found immediate solu ons to the effects of the damage to the refinery and were able to restore produc on with beFer yields of our key products. We expect the new control equipment to be in opera on by the
end of this month.
I n terms of financial results, the fall in the Rouble/ Dollar exchange rate offset to a substan al extent the drama c fall in the oil price in the summer, but nevertheless the Company's profits and EB I TDA have fallen compared with 2013. However, as the two opera onal companies must be financed in Roubles, there are transla on effects that must be taken through the P & L, though they do not have cash effects. I n terms of our cash posi on Urals Energy remains effectively debt free, using trade finance for a few months each year largely to finance the cash flow effects of the fact that the Company only sells crude from A rc cneG once a year. The Board has therefore con nued to review and in some cases submiFed bids for acquisi on opportuni es, but were not prepared to compromise our investment return criteria and hurdles.
O n corporate issues, Urals Energy seFled the li ga on with Mr Vyatcheslav Rovneiko and there is liFle doubt that this has allowed the Company's management to concentrate effec vely on opera ons and other corporate maFers. Mr A lexei Maximov was replaced ini ally by Mr S ergey Uzornikov as interim C EO, but the pressure of combining this role with that of C FO was excessive. Mr Leonid Dyachenko therefore agreed to step in as C EO on an interim basis. We have had discussions with a number of candidates for the role, but believe that un l the financial environment in Russia and the oil market improve, it would not be prudent to make a new appointment. Mr S Kononov, a representa ve of A dler SA , has been appointed as the P resident of the Moscow opera ons company, and is working closely with Mr Dyachenko, Mr O garyov and Mr Uzornikov. They are supported by an experienced team to manage operations and corporate matters.
The Company has weathered extremely tes ng trading and corporate factors during 2013 and 2014. The Board is confident that having done so, we can take advantage of our rela ve financial strength and the support of our shareholders to develop our own reserves and conclude acquisi ons as the general environment improves. Russia has the largest oil and gas reserves, talented engineers, and we have the experience of mee ng the challenges of doing business in this environment.
Leonid Dyachenko
Interim Chief Executive Officer

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