Operating profit for the first half of 2013 was US$1.0 million
as compared with an operating loss of US$0.6 million for the six
months ended 30 June 2012.
The net finance costs during the first half of 2013 were US$3.3
million and net interest benefits was US$0.2 million (H1-2012: net
finance costs of US$1.5 million and net interest cost of US$0.2
million). The main increase is caused by exchange rate movements.
For H1-2013 US$ strengthened vs Russian Rouble by 8% while for the
same period of 2012 it was 2%.
Increase of net finance costs for the six months ended 30 June
2013 resulted in a net loss of US$2.5 million (H1-2012: net loss of
US$2.0 million).
Consolidated management EBITDA in the six months ended 30 June
2013 doubled to US$2.8 million as compared with US$1.4 million
during the six months ended 30 June 2012.
Management EBITDA (US$'000) - Unaudited
Period ended 30 June:
2013 2012
Loss for the period (2,537) (2,043)
Net finance costs 3,296 1,542
Income tax/(benefits) 264 (90)
Depreciation, depletion and amortisation 1,443 1,891
Total non-cash expenses 5,003 3,343
Release of provision 352 -
Other non-cash income (38) 91
------------------------------------------ --------------- ---------------
Total non-recurrent and non-cash items 314 91
Normalised EBITDA 2,780 1,391
Net debt position
As at 30 June 2013, the Company had net debt of US$3.3 million
(calculated as long-term and short-term debt less cash in bank and
less loans issued to related parties). As at 30 June 2012 net cash
was US$6.6 million.
In June 2013, the Company received a loan of US$2.5 million from
Petraco. As at 30 June 2013, the long-term and short-term part
amounted to US$5.5 million (30 June 2012: US$10.2 million).
As at 30 June 2013 and 31 December 2012, the Group impaired a
loan to a formerly related party by US$6.7 million and US$6.3
million, respectively. This amount relates to an overdue loan to a
shareholder and former member of the Group's management team, Mr
Rovneiko. On 9 January 2013, the Company received a final decision
regarding its legal dispute with Mr Rovneiko from the London Court
of International Arbitration. This decision ruled that the Company
had won on all accounts. The Company has formally demanded payment
from Mr Rovneiko and is committed to using all appropriate means to
collect the outstanding amount, however to date Mr Rovneiko has
shown no intent to comply with the decision. For accounting
purposes management has reassessed the carrying value of the loan
and has impaired this fully. However, this does not reduce the
validity of the legal claim against Mr Rovneiko.
Operational update
Petrosakh
During the period under review the Company focused on two main
areas, namely stabilising/minimising the natural decline in
production, and the Company's drilling programme. In doing this,
the following points were focused on:
1. complex geological studies of each well were performed with
the intention of aiding the selection of optimal operating regime
for producing wells. The work carried out enabled a significant
reduction on the natural decline in production;
2. three new surface rod-pumping units were installed, again
assisting in reducing the natural decline in production;
3. a programme to replace insert oil-well sucker-rod pumps on
suspended pumps was launched, significantly reducing future repair
times;
4. the repair of a second gas injection compressor was completed
with minimum idle times for the Company's producing wells;
5. the Company commissioned an independent geological analysis
of its existing well stock in Petrosakh with a view to ensuring the
optimisation of its existing well stock development plan;
6. new cost reduction possibilities were evaluated, including,:
a. the conversion of part of the Company's oil field equipment
for gas usage potentially enabling decreased costs of
production;
b. testing of a new additive for gasoline production which the
Company anticipates has the potential to increase the yield of
light oil products at a lower cost; and
7. Development well #53 was been spudded following the reaching of the target depth.
Initial production testing on Well #53 will be completed during
October 2013.
Downstream
Petrosakh refines and sells 100% of its crude oil production.
Being the only company on the island which has a refinery, Urals
Energy continues to work in a highly competitive refined products
market brought to the island from mainland by the state-owned
conglomerate Rosneft.
The Company works with existing and new customers, which allowed
it to increase netbacks on the sales of oil and oil products by
19.2% and 27.9% respectively to US$59.46 per barrel and US$73.86
per barrel. This is in spite of the increase in excise rate of 25%
from January 2013.
Presently, Petrosakh is participating in tenders with
State-owned companies and has managed to win contracts with major
local customers for fuel shipment during the winter period. The
contracts were signed with JSC "Sakhalinenergo" (the main
electricity and heating supplier on the island), Sakhalin Shipping
Company and several municipal heating companies.
Starting from 1 July 2013, the federal Excise Law provides for
further indexation of excise rates for gasoline. Currently the
excise rate is equal to 8,960 Roubles per ton. However, the Company
is confident that as a result of the seasonal favorable conditions
on the internal market Urals Energy will manage to control and
improve netbacks through to the year-end.
Arcticneft
During the reporting period the main efforts of the Company were
focused on the following:
1. Minimising the decline in production through extensive workovers,
which allowed to keep daily production stable. Current daily
production at Arcticneft is 702 BOPD, average daily production
694 BOPD for the six months ended 30 June 2013, comparing
with an average of 686 BOPD for the twelve months ended
31 December 2012
2. A Passive Seismic Spectroscopy and a separate Micro-Seismic
survey were carried out over a selected area in the West
block. The results revealed five main trends of hydrocarbon
potential consistent with existing exploration strategy.
The results show promise regarding the existing deposit
estimation, as well as encouraging data on possible deeper
targets and pin-point exact location of future drilling
sites. The Company is planning to use this survey report
for new deposit assessment and its future drilling programme
3. Having analysed costs and benefits of the planned side-tracks
drilling, the Company performed an independent geological
analysis of the existing wells stock in Arcticneft. The
results of this research show that subject to certain workovers,
temporally abandoned wells could be put into operation which
will allow to increase the production with higher probability
and at lower cost than side-tracks drilling.
Petraco loan
In 2012, the Company met its obligations under the restructuring
agreement and paid the final loan principal amount of US$7.3
million to Petraco Oil Company Limited. The remaining accrued
interest is to be paid by the Company to Petraco by the end of
November 2013.
In June 2013, the Company entered into a new short-term loan
agreement with Petraco under which Petraco advances the sum of up
to US$7.0 million to the Company. The proceeds of the loan will be
used by the Company to both progress its 2013 drilling plan and
working capital financing.
As at 30 of June 2013, total debt to Petraco was US$5.5 million.
The repayment of all this debt coincides with the shipment of the
tanker from Arcticneft.
Outlook
The Company anticipates loading the tanker for export from
Arcticneft, in Q4 2013.
The Company continues to focus on increasing production and cash
generation at both Arcticneft and Petrosakh. In addition to its
existing operations, the Board is looking at new opportunities, be
it in identifying ways of utilising the upside potential in
downstream and marketing opportunities on the existing acreage, or
evaluating possible acquisition and joint venture targets with a
view to expanding and optimising the portfolio.
The Board aims to finish the year with repayment of outstanding
debts, solid financial position allowing to restore and maximise
value creation for shareholders.
Alexei Maximov
Chief Executive Officer
Consolidated Statement of Financial Position
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