2017 Final Results

RNS Number : 6772S

Petroneft Resources PLC

27 June 2018

 

27 June 2018

PetroNeft Resources plc

("PetroNeft" or the "Group" or the "Company")

2017 Final Results

PetroNeft (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its final results for the year ended 31 December 2017.

Highlights

·     S-375s delineation well at Sibkrayevskoye produced about 150 bopd on test with an electric submersible pump

·     Gross production at Licence 61 in 2017 was 816,476 barrels of oil or an average of 2,237 bopd

o  While this represents a reduction in production it is ahead of expectations due to continued good performance of horizontal wells at South Arbuzovskoye

·     64.6 mmbbls total proved and probable (2P) reserves net to PetroNeft

Outlook

·     Drilling at Cheremshanskoye No. 4 due to commence in the coming weeks - this well could significantly influence the future of the Company

·     Much improved oil prices achieved in 2018 to date

·     Company is progressing business development opportunity with due diligence and legal agreements well advanced.

For further information, contact:

Dennis Francis, CEO, PetroNeft Resources plc	[phone]
Paul Dowling, CFO, PetroNeft Resources plc	[phone]
John Frain/Brian Garrahy, Davy (NOMAD and Joint Broker)	[phone]
Henry Fitzgerald-O'Connor, Canaccord Genuity Limited (Joint Broker)	[phone]
Joe Heron / Douglas Keatinge, Murray Consultants	[phone]

The information contained in this announcement has been reviewed and verified by Mr. Dennis Francis, Director and Chief Executive Officer of PetroNeft, for the purposes of the Note for Mining, Oil and Gas Companies issued by the London Stock Exchange in June 2009.  Mr. Francis holds a B.S. Degree in Geophysical Engineering and a M.S. Degree in Geology from the Colorado School of Mines.  He has also graduated from the Harvard University Program for Management Development.  He is a member of the American Association of Petroleum Geologists and the Society of Exploration Geophysicists.  He has over 40 years' experience in oil and gas exploration and development.

Forward Looking Statements

This report contains forward-looking statements. These statements relate to the Group's future prospects, developments and business strategies. Forward-looking statements are identified by their use of terms and phrases such as 'believe', 'could', 'envisage', 'potential', 'estimate', 'expect', 'may', 'will' or the negative of those, variations or comparable expressions, including references to assumptions.

The forward-looking statements in this report are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These forward-looking statements speak only as at the date of these financial statements

Chairman's Statement

2017 was an important year for our Company particularly at Licence 61 where, with our partner Oil India, we drilled an additional delineation well at Sibkrayevskoye.  In 2017 we also saw continuing challenges for the industry in what remains an uncertain environment, with further volatility both geopolitically and in terms of the oil price internationally.  Our production for the year was ahead of expectations and we have implemented a range of cost cutting measures including salary deferrals and reductions by the Board and senior management.

Operations

Gross production at Licence 61 in 2017 was 816,476 barrels of oil or an average of 2,237 bopd.  No new production wells were drilled during the year and this represents a decline of 17% from 2016 production of 990,931 barrels (2,707 bopd average).  The two horizontal wells drilled at South Arbuzovskoye in 2016 are experiencing natural decline but continue to perform above expectations. Thanks to the operational experience gained from these wells and long term stable production from West Lineynoye, we re-evaluated the West Lineynoye L-8 Lobe development and have designed a low risk development option utilising horizontal development wells, with very good economics.  This development targets about 10 million barrels of oil and utilises existing infrastructure.

In October 2017 we announced the results of the additional delineation well at Sibkrayevskoye. The S-375 well was a 2 km step out from previous wells.  The initial borehole encountered a thin pay interval so the well was side-tracked to the north where it encountered 14.8 m of net oil pay, the thickest found in the field to date.  The development plan for the field is currently being updated and revised, however we are potentially looking at a phase one development option with two initial development pads targeting about 40 million barrels of oil. 

2018 work programme

Following the mixed results of the S-375 well in 2017 and in view of unstable oil prices in the near term, it was decided to defer the first development pad at the Sibkrayevskoye oil field in order to further evaluate the S-375 well results and assess optimal development options.  This review is underway and our next development decision will reflect learnings from previous drilling when assessing the merits of both the Sibkrayevskoye and West Lineynoye L-8 Lobe developments.

In Licence 67 we plan to drill the Cheremshanskoye No. 4 well in 2018.  We feel the well has great potential as it will test multiple targets up-dip from prior wells on the structure that have already tested oil in the same intervals.  This is also the first well to be drilled by the Company based on the modern 3D seismic data acquired in 2014.  We are targeting about 75 million barrels of Russian gross C3 reserves.    

Business Development

The principal near-term objective of the Group is the development of the northern oil fields on Licence 61 together with our partner Oil India, and leveraging the infrastructure already in place. However, we have not lost sight of our longer-term objective of securing assets outside our current licences to provide growth for the future. In that regard, Pavel Tetyakov joined the Company in 2016 and is responsible for new business development in Russia. Since this appointment, we have been very active in pursuing opportunities since then and are far advanced on one particular transaction with due diligence and legal agreements well advanced.   We expect to be in a position to announce a firm deal in Q3 2018.

Reserves

The table below contains the details of the Ryder Scott report as at 1 January 2016 as adjusted for 2016 and 2017 production.  The report, which is available on www.petroneft.com, demonstrates the large potential of the Sibkrayevskoye oil field and the potential upside that could be achieved from prospects such as Emtorskaya, which lies north of Lineynoye.

Ryder Scott Estimated Reserves in Oil Fields (net to PetroNeft)
Oil Field Name	Proved	Proved & Probable	Proved, Probable & Possible
Licence 61	1P mmbo	2P mmbo	3P mmbo
Lineynoye	6.8	12.7	15.7
Tungolskoye	0.3	2.8	3.6
Kondrashevskoye	0.7	1.3	1.6
Arbuzovskoye	1.4	4.0	5.2
Sibkrayevskoye	5.9	29.4	29.4
North Varyakhskoye	0.2	0.4	0.5
	15.3	50.6	56.0
Licence 67
Ledovoye	1.5	14.0	17.4
Total net to PetroNeft	16.8	64.6	73.4

·    Licence 61 as at 31 December 2017 (Ryder Scott report as at 1 January 2016, adjusted for 2016 and 2017 production).

·    Reserves reflect just PetroNeft's 50% share of reserves for each licence.

·    All oil in discovered fields is in the Upper Jurassic section.

·    Reserves were determined in accordance with the Society of Petroleum Engineers ("SPE") Petroleum Resources Management System ("PRMS") rules.

Engagement with Natlata

Following the agreement entered into with our largest shareholder, Natlata Partners Limited ("Natlata") in April 2016, I am pleased to report that the new Board has continued to work well together in 2017/18 and our relationship with Natlata will continue to benefit the Company in future.

Senior Management

In January 2018 Alexey Balyasnikov, the General Director of all our Russian entities retired from the Group having been with us since 2005. I would like to place on record my deep appreciation and that of the Board for Alexey's service and counsel over the years and I wish him well in his retirement.

Review of PetroNeft loss for the year

The loss after taxation for the year was US$3,239,041 (2016: US$5,427,660). The loss included a foreign exchange gain on intra-group loans of US$52,093 (2016: US$77,458), the share of joint venture's net loss in WorldAce Investments of US$4,285,833 (2016: US$5,721,232) and the share of joint venture's net loss in Russian BD Holdings B.V. of US$381,654 (2016: US$288,198).

 

PetroNeft Key Financial Metrics
		2017		2016
		US$'000		US$'000
Continuing operations
Revenue		1,713		2,280
Cost of sales		(1,550)		(2,038)
Gross profit		163		242
Administrative expenses		(1,403)		(2,155)
Exchange gain on intra-Group loans		52		77
Operating loss		(1,188)		(1,836)
Share of joint venture's net loss - WorldAce Investments Limited		(4,286)		(5,721)
Share of joint venture's net loss - Russian BD Holdings B.V.		(382)		(288)
Finance revenue		3,511		3,248
Loss for the year for continuing operations before taxation		(2,345)		(4,597)
Income tax expense		(894)		(830)
Loss for the year		(3,239)		(5,427)

Revenue

Revenue in 2017 and 2016 includes income as operator of both licences and the revenue of PetroNeft's wholly owned subsidiary, Granite Construction in respect of construction services provided in relation to both joint ventures.

Income of PetroNeft Group as Operator of Licence 61 and Licence 67

In the joint venture agreements related to both Licence 61 and Licence 67, PetroNeft is designated as the operator of each Licence. This means that PetroNeft employees and management are responsible for the day to day running of both Licences. Major strategic and financial decisions relating to the Licences require unanimous approval by both shareholders in the respective joint venture agreements.

As PetroNeft management and employees are responsible for day to day matters in both Licences, PetroNeft is entitled to recover a portion of its expenses from the joint ventures. The costs associated with this revenue are included in cost of sales.

In 2017, PetroNeft Group charged a total of US$0.85 million (2016: US$1.46 million) to the joint ventures in respect of management services. PetroNeft also owns a small construction company, Granite Construction, which carries out small ad hoc construction projects such as well pads and on-site accommodation on both Licences, as well as maintaining the winter road network each year. In 2017, Granite Construction charged the WorldAce Group US$0.86 million (2016: US$0.81 million) in respect of these services.

Administrative expenditure was reduced by 35% in the year. The Company implemented a cost cutting program across the Group and the Directors and management have agreed to reduce and defer significant portions of their remuneration to assist the Company. A total of US$824,080 has been deferred by the Directors and senior management in order to assist the Company - see Note 14 for details.

Finance Revenue

Most of the finance revenue relates to interest receivable on loans to joint ventures. During 2017 PetroNeft had interest receivable of US$3,238,839 (2016: US$3,011,025) on its loans to WorldAce Group and US$270,773 (2016: US$234,402) on its loans to Russian BD Holdings B.V.

 

Key Financial Metrics - WorldAce Group

Because of the equity method of consolidation that applies to PetroNeft's interest in WorldAce, it is difficult to extract meaningful metrics from the PetroNeft consolidated income statement. Therefore, the metrics below are an extraction from the audited financial statements of the WorldAce Group and give an indication as to the performance of Licence 61:

		WorldAce Group		WorldAce Group
		2017		2016
		US$'000		US$'000
Continuing operations
Revenue		27,637		23,208
Cost of sales		(25,273)		(22,399)
Gross profit		2,364		809
Administrative expenses		(3,093)		(3,229)
Operating loss		(729)		(2,420)
Loss on disposal of oil and gas properties		-		(876)
Write-off of exploration and evaluation assets		(26)		(1,420)
Finance revenue		66		19
Finance costs		(7,883)		(6,745)
Loss for the year for continuing operations before taxation		(8,572)		(11,442)
Income tax		-		-
Loss for the year		(8,572)		(11,442)
PetroNeft's 50% share		(4,286)		(5,721)

Net Loss - WorldAce Group                              

PetroNeft's share of the net loss of WorldAce Group for the full year decreased to US$4.3 million from US$5.7 million in 2016. The decrease in the loss for the year before taxation can be attributed to an improved oil price and lower costs.  Of the US$7.7 million in interest payable by WorldAce, US$3.2 million is payable to PetroNeft.

Revenue, Cost of Sales and Gross Margin - WorldAce Group

Gross Revenue from oil sales was US$27.6 million for the year (2016: US$23.2 million). Cost of sales includes depreciation of US$2.6 million (2016: US$3.3 million), which was lower mainly due to lower production. The gross margin improved during the year due to improved oil prices. Operating costs per barrel (cost of sales excluding depreciation and Mineral Extraction Tax) were higher at US$10.36 (2016: US$8.82 per barrel) due to lower production. We would expect the gross margin to improve in future periods as our facilities and field operations are fully staffed and can handle additional production from the Sibkrayevskoye oil field once it comes online. We produced 816,476 barrels of oil (2016: 990,931 barrels) in the year and sold 822,388 barrels of oil (2016: 985,824 barrels) achieving an average oil price of US$35 per barrel (2016: US$24 per barrel). All oil was sold on the domestic market in Russia.

Finance Costs - WorldAce Group

Gross Finance costs of US$7.9 million (2016: US$6.7 million) mainly relates to interest on loans from PetroNeft and Oil India.

Taxation - WorldAce Group

There is no tax payable in 2017 or 2016.

 

Current and Future Funding of PetroNeft Group

In previous Annual Reports we outlined that PetroNeft expected to start receiving interest due on its shareholder loans to WorldAce in the second half of 2017 once the development of the Sibkrayeskoye oil field in Licence 61 was up and running. The S-374 appraisal well drilled in 2016 at the Sibkrayevskoye oil field, to assess the true extent of the field 10km to the south of existing wells, did not encounter commercial hydrocarbons. The result of this well has led to the postponement of the commencement of the development of the Sibkrayevskoye oil field. As a consequence of this, the date by which PetroNeft expects to start receiving interest due on its shareholder loans to WorldAce has been delayed until 2019 at the earliest from the previously guided estimate of late 2017.

The success of the S-375 well in 2017 has led to a period of extended testing at Sibkrayevskoye and in 2018 we will refine and re-evaluate the development program.

While there were consolidated net current liabilities at the year-end of US$1.1m (2016: net current assets of US$410k), the Company has implemented a cost cutting program across the Group and the Directors and management have agreed to reduce and defer significant portions of their remuneration in order to assist the Company. Note 24 outlines the amounts owed to the Board and management in this regard.

In January 2018 we agreed a secured loan facility for up to US$2 million with Swedish company Petrogrand AB ("Petrogrand"). The loan matures on 31 December 2018.  The loan facility will be used for general corporate purposes and to finance the drilling programme in 2018. This loan facility will provide time and space for a more long-term financing solution to be put in place. This loan facility is secured and Petrogrand AB have a floating charge over the assets of the Group. 

The Company is in advanced discussions on a transaction that would refinance the US$2 million loan and provide additional financing with basic terms agreed and due diligence and legal documentation well advanced. We expect to conclude this transaction in Q3 2018. The Company is also pursuing other options such as the sale or farmout of Licence 67.

The Directors are satisfied that the options being pursued are progressing well and are highly confident the funding gap can be solved.

The ability to re-finance the Petrogrand loan represents a material uncertainty that may cast significant doubt upon the Group's and the Company's ability to continue as a going concern as described in Note 2 to the Consolidated Financial Statements.

Summary

2017 was a mixed year for PetroNeft with positives and negatives coming from the work programme.  The lessons learned from the horizontal wells drilled in 2015 and 2016 have been used to re-evaluate the development of the West Lineynoye L-8 Lobe leading to a low risk, low cost development option with very good economics.  The mixed results of the S-375 well at Sibkrayevskoye has led to another delay in commencement of production there pending further review of the well results and development options which is underway. 

Outlook

Cash-flow from operations at Licence 61 has been higher than forecast so far in 2018 due to the continued strong performance of the horizontal wells at South Arbuzovskoye, the recent very positive improvement in oil prices and significant reduction we have achieved in operating expenses and overhead costs. We will do everything possible to continue this positive trend as we go forward.

We look forward to drilling the high potential Cheremshanskoye No. 4 well in Licence 67 in 2018; this well could significantly influence the future of the Company.  The drilling rig and necessary materials to drill the well have already been mobilized to location on winter roads and we plan to drill the well this summer. 

Our industry is continuing to experience unstable times but we have future development targets such as the West Lineynoye L-8 Lobe and Sibkrayevskoye that will be profitable even at reduced oil prices.

Annual Report

The annual report will be mailed to shareholders and published on the Company's website (www.petroneft.com) on 29 June 2018.

Finally, I know that I speak for all the Directors, management and staff of the Group in giving sincere thanks to our shareholders, both old and new, for your continued support throughout the past year.

David Golder

Non-Executive Chairman

The Preliminary Results financial statements for the year ended 31 December 2017 can be accessed by clicking on the link below:

http://www.rns-pdf.londonstockexchange.com/rns/6772S_1-2018-6-26.pdf

 

END

 

 

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