Interim Results

RNS Number : 5489O

Petroneft Resources PLC

20 September 2011

 



PetroNeft Resources plc

("PetroNeft" or the "Company")

2011 Interim Results 

PetroNeft Resources plc (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its results for the 6 months ended 30 June 2011.

Highlights: 

·    Maiden pre-tax profit of US$3.8 million

·    H1 production of 399,327 barrels of oil for the period

·    Major exploration success at Sibkrayevskaya with potential to increase Group reserves by at least 50%

·    Extension of Lineynoye field to the north has significant implications for overall structure size

·    New tax law passed which will boost future cash flows

·    Improved debt facility for up to US$75 million agreed with Macquarie Bank

Dennis Francis, Chief Executive Officer of PetroNeft Resources plc, commented:

"The first part of 2011 has been very busy with the highlights being the major discovery at Sibkrayevskaya and the extension of the Lineynoye field to the North. The coming months will see results from the remaining high impact exploration wells together with increasing production as the  hydraulic fracturing programme proceeds."

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]
Charles Berkeley/Henry Fitzgerald-O'Connor, Canaccord Genuity Limited (Joint Broker)	[phone]
Martin Jackson, Citigate Dewe Rogerson	[phone]
Joe Murray/Ed Micheau, Murray Consultants	[phone]

PetroNeft Resources Plc

 Chairman's Statement

Dear Shareholder,

To date, 2011 has seen further significant progress for PetroNeft. Our exploration programme has resulted in our largest discovery to date at Sibkrayevskaya and drilling results at two of our other targets are due in September. On the production well drilling, while we had a disappointing result at Pad 3 to the south, we have significantly extended the Lineynoye oil field beyond previous estimates to the north of Pad 2 where we continue to encounter encouraging net oil pays in the northern portion of the field. On balance, we expect the Lineynoye field reserves to remain about as predicted earlier, while very substantial reserves will be added at year-end as a result of our 2011 exploration drilling programme.

Production

Production in the six months to 30 June 2011 was 399,327 barrels of oil or an average of 2,182 bopd. During January and February most of the wells were offline in order for the hydraulic fracturing programme to be carried out. This programme achieved good results and provided essential information that will help us optimise the design of these programmes in the future to achieve even better results.

Beginning in October 2011, we plan to carry out a new fracture stimulation programme of about eight wells primarily focussed on new wells at Pad 2. In the first quarter of 2012 we will carry out a further fracture stimulation programme on the remaining wells drilled during 2011 and, depending on the results, we may also re-frac some of the Pad 1 wells that initially had smaller fracture stimulations carried out in early 2011.

Development drilling programme

At the beginning of 2011 we planned to drill 17 new production wells at the Lineynoye oil field, nine at Pad 2 and eight at Pad 3. We now expect to drill a total of 14 or 15 wells this year, all but two of which will be from Pad 2.

At Pad 2 we have now drilled ten wells and expect to drill two or three more before the year end. The principal reasons for adding wells at this location were the thicker than expected net pay encountered and discovering that the field extends further north than expected. At Pad 3 the first two wells encountered thinner net pays than anticipated and we took the decision to suspend drilling from this pad in order to test the two wells over the coming months and re-allocate technical and financial resources to drill additional wells north of Pad 2 where thicker pays have been encountered.

The results at Pad 3 led us to amend our near term production targets at the end of June 2011. While we will lose some reserves from the Pad 3 area when we compile our year end reserve report we are confident that this will be substantially offset by reserve additions north of Pad 2. The results we are achieving from the drilling at Pad 2, combined with updated seismic interpretations that incorporate the drilling results, also indicates that not only are the Lineynoye and West Lineynoye oil fields connected but that the overall Lineynoye field could extend significantly further north and be connected to the Emtorskaya high north of Lineynoye.

Exploration

Five exploration/delineation wells will be drilled in 2011, three at Licence 61 and two at Licence 67. Two have been drilled to date, one of which led to our largest discovery to date at Sibkrayevskaya. The third and fourth wells are in progress and their results should be available shortly.

Licence 61

The Kondrashevskoye No. 2 well was completed in June 2011 and encountered 2.3 m of net pay in the J1 interval,  similar to the 2008 discovery well. The well tested high quality 41⁰ API gravity crude oil at a prorated inflow rate of 32 bopd on a short open hole test (without stimulation). As neither Kondrashevskoye well encountered the oil water contact for the field we sidetracked the No. 2 well down-dip to locate the oil water contact and determine the full reserve potential of the field. The reservoir interval of 3 metres in the sidetrack section was slightly thicker than in the vertical well with the top metre of the reservoir being oil bearing. Production casing has been run and cemented in the well so it can be used when the field is developed.

Based on these results, the well has most likely confirmed the existing independent Ryder Scott 2P reserves of 8.1 mmbo attributed to the field and we will now update the reserves with the Russian State Reserve committee in preparation for field development. The exact timing of development will depend upon how the economics of this field compares with other nearby fields, most notably Arbuzovskoye.

The second well in this year's programme was drilled at the Sibkrayevskaya prospect. The well was spudded in July and target depth was reached in early August.

The Sibkrayevskaya No. 372 well was a follow up to well No. 370 which was drilled in 1972. A comprehensive re-interpretation of the vintage well logs and drilling data from the 370 well using digitised logs and modern interpretation tools had indentified potential "missed pay" of 8.4 metres in the Upper Jurassic J1 interval. In the new well, the Upper Jurassic J1 oil reservoir horizon was intersected as expected and encountered 12.3 metres of net pay, exceeding pre-drill estimates. An open hole test was conducted over this interval and tested at a pro-rated inflow of 170 bopd unstimulated. The oil is of good quality with an API gravity of 37 degrees, which is consistent with other fields in Licence 61. The well has now been cased and a programme of drill stem testing is in progress.

Sibkrayevskaya is a very large structure which will require additional seismic and well delineation. The 372 well was drilled in a flank position on the structure and current mapping shows an area of over 50 square kilometres up dip from the oil-down-to level defined in the well. Current indications are that the ultimate recoverable reserves in the field are likely to be significantly larger than the 44 million barrel pre-drill estimate defined by Ryder Scott and the field will certainly be an important commercial development project for PetroNeft. The discovery also extends the area of known oil to the northeast corner of the licence area and improves the prospectivity of other structures in this area.

The final well to be drilled at Licence 61 in 2011 is at North Varyakhskaya. This well was spudded in August and a result is expected in September.

Licence 67

Two exploration wells are planned at Licence 67 in 2011. The first well, at the large Cheremshanskaya prospect, was spudded in late August. The well is targeting three separate horizons at the Upper, Middle and Lower Jurassic zones. Each horizon will be cored, tested and logged separately and initial results are expected in late September with results of lower horizons coming in October.

The second well at Licence 67 is at the Ledovoye oil field to delineate the Upper Jurassic zone but also targeting the Lower Cretaceous horizon. This well will spud in November with results expected in December.

Successful debt refinancing

In March 2011 PetroNeft agreed a revised debt facility with Macquarie Bank. The new loan is a longer term scalable borrowing base facility with increased flexibility at lower cost. Under the three year loan the initial available amount will be US$30 million with potential to increase up to US$75 million through the addition of new discoveries and developments subject to credit approval. The borrowing base will be reviewed every six months. The first review was completed in July 2011 and re-confirmed the US$30 million availability.

Financial results for the period

The net profit after tax for the period was US$3,067,178 (June 2010 loss: US$(5,287,356)). The profit includes a foreign exchange gain of US$5,969,474 on loans denominated in US Dollars, Russian Roubles and Euro from PetroNeft to its Russian subsidiaries Stimul-T and Lineynoye whose functional currency is the Russian Rouble.

Key Financial Metrics			Unaudited				Audited
			6 months ended 30-Jun-11		6 months ended 30-Jun-10		Year ended 31/12/2010
			US$		US$		US$
Revenue			15,974,980		-		5,155,646
Cost of sales			(12,827,718)		-		(4,284,181)
Gross profit			3,147,262		-		871,465
Gross margin			20%		-		17%
Administrative expenses
Overheads			3,622,312		2,023,132		5,601,591
Share-based payment expense			558,291		207,749		460,500
Foreign exchange (gain)/loss on intra-group loans			(5,969,474)		1,393,741		137,054
Other foreign exchange loss/(gain)			22,951		133,851		(285,038)
			(1,765,920)		3,758,473		5,914,107
Finance revenue			31,493		94,406		126,595
Finance costs			(1,156,829)		(154,095)		(1,356,918)
Income tax expense			(720,668)		(314,416)		(852,429)
Profit/(Loss) for the period attributable to equity holders of the Parent			3,067,178		(5,287,356)		(7,125,394)
Capital expenditure in the period			30,820,764		14,173,486		41,646,953
Net proceeds of equity share issues			-		-		40,793,563
Bank and cash balance at period-end (including restricted cash)			3,736,309		600,098		25,281,881

Tax changes in Russia

In July 2011 President Medvedev signed into law an amendment to the law governing Mineral Extraction Tax ("MET"). The amendment introduces discounted rates of MET for new oil fields with initial recoverable reserves of less than five million tonnes (about 37 million barrels). The standard rate of MET can be reduced by up to 50% depending on the size of the oil field. This new law will significantly enhance the value and cash generation potential of  the Arbuzovskoye, Kondrashevskoye, Tungolskoye and Ledovoye oil fields once they are brought into production. For example, production from the Arbuzovskoye oil field will qualify for a 46% discount to the standard rate of MET.

Separately, recent media reports suggest that the highest rate of export duty on crude oil will be reduced from 65% to 60% possibly as early as 1 October 2011. Such a change would further improve the profitability and cash flows from all of our oil fields.

Conclusion

The first half of 2011 has been a busy period for PetroNeft in terms of both production and exploration. While the Lineynoye production rate build up has been slower than desired we have learned key lessons from the work carried out to date and the outlook for growing our production this year and in future years is very good. We are particularly pleased with the extension of the field to the north and the implications this has for the overall size of the field and its connection with other structures.

Now that we are getting in to the heart of our exploration programme for 2011, I look forward to bringing you further good news to supplement the major success already achieved at Sibkrayevskaya where it is likely we have increased Group reserves by at least 50%. On behalf of the Board I would like to thank the management and staff for their tremendous efforts in this period.

David Golder

Non-Executive Chairman

Interim Consolidated Income Statement
For the 6 months ended 30 June 2011			Unaudited				Audited
			6 months ended      30-Jun-11		6 months ended    30-Jun-10		Year ended 31/12/2010
	Note		US$		US$		US$
Continuing operations
Revenue			15,974,980		-		5,155,646
Cost of sales			(12,827,718)		-		(4,284,181)
Gross profit			3,147,262		-		871,465
Administrative expenses			(4,203,554)		(2,364,731)		(5,777,053)
Exchange profit/(loss) on intra-Group loans			5,969,474		(1,393,741)		(137,054)
Operating profit/(loss)			4,913,182		(3,758,472)		(5,042,642)
Finance revenue			31,493		94,406		126,595
Finance costs	4		(1,156,829)		(154,095)		(1,356,918)
Share-based payment in relation to Macquarie loan			-		(1,154,779)		-
Profit/(Loss) for the period for continuing operations before taxation			3,787,846		(4,972,940)		(6,272,965)
Income tax expense	5		(720,668)		(314,416)		(852,429)
Profit/(Loss) for the period attributable to equity holders of the Parent			3,067,178		(5,287,356)		(7,125,394)
Profit/(Loss) per share attributable to ordinary equity holders of the Parent
Basic and diluted - US dollar cent			0.74		(1.51)		(1.97)
Interim Consolidated Statement of Comprehensive Income
For the 6 months ended 30 June 2011
			Unaudited				Audited
			6 months ended      30-Jun-11		6 months ended     30-Jun-10		Year ended 31/12/2010
			US$				US$
Profit/(Loss) for the period attributable to equity holders of the Parent			3,067,178		(5,287,356)		(7,125,394)
Currency translation adjustments			3,130,795		(3,040,984)		(33,696)
Total comprehensive profit/(loss) for the period attributable to equity holders of the Parent			6,197,973		(8,328,340)		(7,159,090)

Interim Consolidated Balance Sheet
as at 30 June 2011
			Unaudited				Audited
			30-Jun-11		30-Jun-10		31-Dec-10
	Note		US$		US$		US$
Assets
Non-current Assets
Oil and gas properties	6		91,334,153		41,367,597		62,143,801
Property, plant and equipment	7		2,369,291		1,568,566		1,674,216
Exploration and evaluation assets	8		28,494,908		19,943,958		21,391,491
Leasehold land payments			-		174,733		-
			122,198,352		63,054,854		85,209,508
Current Assets
Inventories	9		1,679,254		4,199,251		907,947
Trade and other receivables	10		5,072,771		3,503,438		8,064,978
Cash and cash equivalents	11		1,236,309		600,098		22,781,881
Restricted cash	11		2,500,000		-		2,500,000
			10,488,334		8,302,787		34,254,806
Assets held for sale			3,433,968		-		2,020,678
			13,922,302		8,302,787		36,275,484
Total Assets			136,120,654		71,357,641		121,484,992
Equity and Liabilities
Capital and Reserves
Called up share capital			5,636,142		4,726,705		5,624,840
Share premium account			122,431,629		81,404,891		122,082,388
Share-based payments reserve			4,344,830		4,011,115		3,641,064
Retained loss			(22,810,619)		(24,039,759)		(25,877,797)
Currency translation reserve			(2,697,537)		(8,835,620)		(5,828,332)
Other reserves			336,000		336,000		336,000
Equity attributable to equity holders of the Parent			107,240,445		57,603,332		99,978,163
Non-current Liabilities
Provisions			965,278		467,685		743,670
Interest bearing loans and borrowings	13		14,630,284		-		-
Deferred tax liability			2,352,250		1,122,570		1,636,475
			17,947,812		1,590,255		2,380,145
Current Liabilities
Trade and other payables	12		8,932,397		3,966,261		5,401,479
Non interest bearing loans and borrowings	13		2,000,000		-		-
Interest bearing loans and borrowings	13		-		8,197,793		13,725,205
			10,932,397		12,164,054		19,126,684
Total Liabilities			28,880,209		13,754,309		21,506,829
Total Equity and Liabilities			136,120,654		71,357,641		121,484,992

Interim Consolidated Statement of Changes in Equity
For the 6 months ended 30 June 2011
	Share capital		Share premium		Other reserves		Currency translation reserve		Retained loss		Total
	US$		US$		US$		US$		US$		US$
At 1 January 2010	4,724,013		81,328,170		2,704,929		(5,794,636)		(18,752,403)		64,210,073
Loss for the year	-		-		-		-		(7,125,394)		(7,125,394)
Currency translation adjustments	-		-		-		(33,696)		-		(33,696)
Total comprehensive loss for the year	-		-		-		(33,696)		(7,125,394)		(7,159,090)
New share capital subscribed	872,841		42,307,945		-		-		-		43,180,786
Transaction costs on issue of share capital	-		(2,387,223)		-		-		-		(2,387,223)
Share options exercised in year	27,406		813,714		-		-		-		841,120
Remuneration and other emoluments paid in shares	580		19,782		-		-		-		20,362
Share-based payment expense	-		-		460,500		-		-		460,500
Share-based payment expense - Macquarie warrants	-		-		811,635		-		-		811,635
At 31 December 2010	5,624,840		122,082,388		3,977,064		(5,828,332)		(25,877,797)		99,978,163
At 1 January 2011	5,624,840		122,082,388		3,977,064		(5,828,332)		(25,877,797)		99,978,163
Profit for the period	-		-		-		-		3,067,178		3,067,178
Currency translation adjustments	-		-		-		3,130,795		-		3,130,795
Total comprehensive profit for the period	-		-		-		3,130,795		3,067,178		6,197,973
Share options exercised in period	11,302		349,241		-		-		-		360,543
Share-based payment expense					558,291						558,291
Share-based payment expense - Macquarie warrants	-		-		145,475		-		-		145,475
At 30 June 2011	5,636,142		122,431,629		4,680,830		(2,697,537)		(22,810,619)		107,240,445

Interim Consolidated Cash Flow Statement
For 6 months ended 30 June 2011
			Unaudited				Audited
			6 months ended 30-Jun-11		6 months ended            30-Jun-10		Year ended 31/12/2010
			US$		US$		US$
Profit/(Loss) before taxation			3,787,846		(4,972,940)		(6,272,965)
Adjustment to reconcile profit/(loss) before tax to net cash flows
Non-cash
Depreciation and amortisation			1,597,085		130,785		811,949
Share-based payment expense			558,291		207,749		460,500
Warrant costs			-		1,154,779		-
Unwinding of discount on decommissioning provision			64,846		-		20,787
Deposit paid for pipeline usage			(30,522)		-		342,053
Write off of leasehold land payments			-		-		176,825
Remuneration and other emoluments paid in shares			-		-		20,362
Finance revenue			(31,493)		(94,406)		(126,595)
Finance costs			1,122,505		154,219		994,078
Working capital adjustments
(Increase)/decrease in trade and other receivables			966,019		(6,875,364)		(3,444,866)
Increase in inventories			(606,526)		-		(808,561)
Increase/(decrease) in trade and other payables			(3,995,097)		468,678		2,944,919
Net cash flows received/(used) from/(in) operating activities			3,432,954		(9,826,500)		(4,881,514)
Investing activities
Purchase of oil and gas properties			(18,390,893)		(15,268,710)		(32,006,996)
Advance payments to contractors			(1,623,828)		2,285,217		(3,883,284)
Advance payment to purchase License 67			-		1,160,556		-
Purchase of property, plant and equipment			(755,057)		(21,260)		(217,524)
Disposals of property, plant and equipment			-		-		1,154
Exploration and evaluation payments			(5,261,525)		(2,329,289)		(3,736,142)
Investments in assets held for sale			(1,413,290)		-		(2,500,000)
Interest received			31,493		94,406		161,961
Net cash used in investing activities			(27,413,100)		(14,079,080)		(42,180,831)
Financing activities
Proceeds from issue of share capital			-		-		43,180,786
Transaction costs of issue of shares			-		-		(2,387,223)
Proceeds from exercise of options			360,543		79,413		841,120
Proceeds from loan facilities			17,000,000		9,000,000		16,000,000
Transaction costs on loans and borrowings			(271,743)		-		(584,467)
Repayment of loan facilities			(14,212,000)		-		(1,788,000)
Interest paid			(593,605)		(114,167)		(835,467)
Net cash received from financing activities			2,283,195		8,965,246		54,426,749
Net (decrease)/increase in cash and cash equivalents			(21,696,951)		(14,940,334)		7,364,404
Translation adjustment			151,379		(186,047)		(309,002)
Cash and cash equivalents at the beginning of the period			22,781,881		15,726,479		15,726,479
Cash and cash equivalents at the end of the period	11		1,236,309		600,098		22,781,881

Notes to the interim condensed consolidated financial statements

for the six months ended 30 June 2011

1.         Corporate information

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2011 were authorised for issue in accordance with a resolution of the Directors on 19 September 2011.

PetroNeft Resources plc ('the Company', or together with its subsidiaries, 'the Group') is a Company incorporated in Ireland. The Company is listed on the Alternative Investment Market ('AIM') of the London Stock Exchange and the Enterprise Securities Market ('ESM') of the Irish Stock Exchange. The address of the registered office and the business address in Ireland is 20 Holles Street, Dublin 2. The Company is domiciled in the Republic of Ireland.

The principal activities of the Group are oil and gas exploration, development and production. 

2.          Accounting policies

2.1       Basis of Preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2011 have been prepared in accordance with IAS 34 Interim Financial Reporting.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2010 which are available on the Group's website - www.petroneft.com.

The annual financial statements as at 31 December 2010 were audited by Ernst and Young in accordance with section 193 of the Companies Act, 1990. The audit report issued by Ernst and Young was unqualified and did not include a reference to any matter to which the auditors drew attention by way of emphasis without qualifying their audit report.

The interim condensed consolidated financial statements are presented in US dollars ("US$").

2.2       Significant Accounting Policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2010.

3.          Segment information

At present the Group has one reportable operating segment, which is oil exploration and production. As a result, there are no further disclosures required in respect of the Group's reporting segment.

The risk and returns of the Group's operations are primarily determined by the nature of the activities that the Group engages in, rather than the geographical location of these operations.  This is reflected by the Group's organisational structure and the Group's internal financial reporting systems.

Management monitors and evaluates the operating results for the purpose of making decisions consistently with operating profit or loss in the consolidated financial statements.

Geographical segments

All of the Group's sales are in Russia. Substantially all of the Group's capital expenditures are in Russia.

	Non-current assets
	Assets are allocated based on where the assets are located:
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$		US$		US$
	Russia			122,186,983		63,043,883		85,200,373
	Ireland			11,369		10,972		9,135
				122,198,352		63,054,854		85,209,508

4.	Finance costs
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$		US$		US$
	Interest on bank loans			1,122,505		154,897		643,542
	Unwinding of discount on decommissioning provision			64,846		(802)		20,787
	Discount on deposit paid for pipeline usage (see below)			(30,522)		-		342,053
	Share-based payment in relation to initial US$5 million loan facility			-		-		350,536
				1,156,829		154,095		1,356,918

During 2010 the Group paid a deposit of US$400,000 to Nord Imperial for the usage of their pipeline. This deposit will be returned at the end of the contract which is in 2033. In the interim consolidated financial statements this deposit has been discounted and the reversal of a discount of US$30,522 has been taken to finance costs in the current year.

5.	Income tax
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$		US$		US$
	Current income tax
	Current income tax charge			4,889		17,977		42,083
	Deferred tax
	Relating to origination and reversal of temporary differences			715,779		296,439		810,346
	Income tax expense reported in the Consolidated Income Statement			720,668		314,416		852,429

6.	Oil and gas properties
		Wells		Equipment and facilities		Pipeline		Total
		US$		US$		US$		US$
	Cost
	At 1 January 2010	15,408,490		737,610		11,036,987		27,183,087
	Additions	19,999,210		12,816,849		3,244,417		36,060,476
	Transfer to property, plant and equipment	-		48,884		-		48,884
	Translation adjustment	(194,658)		(49,843)		(107,368)		(351,869)
	At 1 January 2011	35,213,042		13,553,500		14,174,036		62,940,578
	Additions	13,359,997		11,576,349		-		24,936,346
	Translation adjustment	3,313,649		1,441,491		1,267,791		6,022,931
	At 30 June 2011	51,886,688		26,571,340		15,441,827		93,899,855
	Depreciation
	At 1 January 2010	16,316		1,510		-		17,826
	Charge for the year	535,613		217,360		31,590		784,563
	Translation adjustment	(1,862)		(2,820)		(930)		(5,612)
	At 1 January 2011	550,067		216,050		30,660		796,777
	Charge for the period	1,338,045		227,086		101,144		1,666,275
	Translation adjustment	73,350		23,963		5,337		102,650
	At 30 June 2011	1,961,462		467,099		137,141		2,565,702
	Net book values
	At 30 June 2011	49,925,226		26,104,241		15,304,686		91,334,153
	At 31 December 2010	34,662,975		13,337,450		14,143,376		62,143,801

The net book value at 30 June 2011 includes US$37,512,574 (31 December 2010: US$17,288,826) in respect of assets which are not yet being depreciated.

Additions are construction works mainly in relation to new production wells, the Central Processing Facility and oilfield infrastructure.

7.	Property, Plant and Equipment
		Land and		Plant and		Motor
		buildings		machinery		vehicles		Total
		US$		US$		US$		US$
	Cost
	At 1 January 2010	302,641		1,762,039		145,732		2,210,412
	Reclassification	800,795		(800,795)		-		-
	Additions	1,669		171,706		45,818		219,193
	Transfer from oil and gas properties	-		-		(48,884)		(48,884)
	Disposals	-		-		(17,869)		(17,869)
	Translation adjustment	(5,390)		(13,086)		(1,200)		(19,676)
	At 1 January 2011	1,099,715		1,119,864		123,597		2,343,176
	Additions	-		755,056		-		755,056
	Translation adjustment	98,490		114,406		11,085		223,981
	At 30 June 2011	1,198,205		1,989,326		134,682		3,322,213
	Depreciation
	At 1 January 2010	25,551		375,201		33,552		434,304
	Charge for the year	64,365		176,496		15,045		255,906
	Disposals	-		-		(16,715)		(16,715)
	Translation adjustment	(444)		(3,804)		(287)		(4,535)
	At 1 January 2011	89,472		547,893		31,595		668,960
	Charge for the period	34,231		172,203		13,915		220,349
	Translation adjustment	8,742		51,746		3,125		63,613
	At 30 June 2011	132,445		771,842		48,635		952,922
	Net book values
	At 30 June 2011	1,065,760		1,217,484		86,047		2,369,291
	At 31 December 2010	1,010,243		571,971		92,002		1,674,216

8.	Exploration and evaluation assets
						Exploration & Evaluation Expenditure
						US$
	Cost
	At 1 January 2010					18,217,242
	Additions					5,367,284
	Reclassified as assets held for sale					(2,020,678)
	Translation adjustment					(172,357)
	At 1 January 2011					21,391,491
	Additions					5,129,362
	Translation adjustment					1,974,055
	At 30 June 2011					28,494,908
	Net book values
	At 30 June 2011					28,494,908
	At 31 December 2010					21,391,491

Exploration and evaluation expenditure represents active exploration projects. These amounts will be written off to the Consolidated Income Statement as exploration costs unless commercial reserves are established, or the determination process is not completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of these assets will ultimately be recovered, is inherently uncertain.

In accordance with IFRS 6, once commercial viability is demonstrated, the capitalised exploration and evaluation costs are transferred to oil and gas properties or intangibles, as appropriate after being assessed for impairment.

Additions in the six months ended 30 June 2011 relate mainly to drilling of exploration wells in Sibkrayevskaya and North Varyakhskaya prospects, Kondrashevskoye oilfield and exploration works in relation to Licence 61. All expenditure in connection with Licence 67 has been classified as assets held for sale.

9.	Inventories
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$				US$
	Oil stock			1,350,367		22,075		709,890
	Materials			328,887		4,177,176		198,057
				1,679,254		4,199,251		907,947

10.	Trade and other receivables
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$		US$		US$
	Russian VAT			2,485,260		2,910,390		3,251,701
	Other receivables			511,887		129,887		691,674
	Advances to and receivables from related parties (Note 14)			1,415,173		1,162		1,957,647
	Advances to contractors			411,404		348,695		1,925,637
	Prepayments			249,047		113,304		238,319
				5,072,771		3,503,438		8,064,978

11.	Cash and Cash Equivalents and Restricted Cash
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$		US$		US$
	Cash at Bank and in Hand			1,236,309		600,098		22,781,881
	Restricted cash			2,500,000		-		2,500,000
				3,736,309		600,098		25,281,881

At 30 June 2011 and 31 December 2010 restricted cash amounting to US$2.5 million was held in a Macquarie Debt Service Reserve Account ("DSRA"). This account is part of the security package held by Macquarie and may be offset against the loan in the event of a default on the loan or by agreement between the parties.

12.	Trade and other payables
				Unaudited				Audited
				30-Jun-11		30-Jun-10		2010
				US$		US$		US$
	Trade payables			3,826,711		2,862,806		3,858,187
	Trade payables to related parties (Note 14)			3,962,422		430,044		614,078
	Corporation tax			99,682		78,527		105,569
	Other taxes and social welfare costs			60,378		64,276		176,804
	Other payables			177,404		94,068		128,099
	Accruals and deferred income			805,800		436,540		518,742
				8,932,397		3,966,261		5,401,479

13.	Loans and borrowings
							Unaudited				Audited
			Effective interest rate		Maturity		30-Jun-11		30-Jun-10		2010
			%				US$		US$		US$
	Interest bearing:
	Macquarie Bank - US$30,000,000 loan facility		18.87%		31-Aug-11		-		8,197,793		-
	Macquarie Bank - US$30,000,000 loan facility		17.21%		30-Nov-11		-		-		13,725,205
	Macquarie Bank - US$75,000,000 loan facility		8.44%		31-May-14		14,630,284		-		-
	Non  interest bearing:
	Arawak - US$2,000,000 loan		0.00%		31-Dec-11		2,000,000		-		-
							16,630,284		8,197,793		13,725,205

On 30 March 2010, PetroNeft entered into a US$5 million loan facility with Macquarie Bank ("Macquarie"). As part of this agreement, Macquarie was granted 4.7 million warrants over the ordinary shares of PetroNeft at a strike price of STG£ 30p, exercisable any time up to 28 February 2012. The loan was set to mature on 30 June 2011.

On 28 May 2010 the US$5 million facility was re-financed with a new loan facility agreement for up to US$30 million with Macquarie. Under this agreement Macquarie was granted an additional 1 million warrants at a strike price of STG£ 37.81p exercisable any time up to 28 May 2014 and the possibility to acquire up to an additional 1 million warrants at a strike to be determined based on a 15% premium to the volume weighted average share price up to the date of issue of any additional warrants. There was also a 1% cash arrangement fee associated with this new loan facility.

On 19 August 2010 Macquarie was granted an additional 500,000 warrants at a strike price of STG£ 50.1p in connection with US$30 million facility.

On the basis that Macquarie committed significant technical, engineering and legal resources to negotiating and agreeing the loan facility and subsequent draw downs, the warrants granted to Macquarie were in lieu of arrangement fees. The cost of the warrants fall within the scope of IFRS 2 Share-Based Payments. This share-based payment expense constitutes a transaction cost under IAS 39 Financial Instruments: Recognition and Measurement and is included in the initial carrying amount of the loan facility and amortised over the duration of the loan. The total share-based payment expense in connection with warrants granted to Macquarie during the

13.     Loans and borrowings (continued)

year amounted to US$0.8 million of which an amount of US$350,536 was expensed to the income statement on extinguishment of the US$5 million loan facility.

In April 2011 PetroNeft signed a new loan facility agreement with Macquarie Bank Limited for up to US$75 million subject to the satisfaction of conditions precedent primarily related to the perfection of security over certain physical assets of the Group's Russian subsidiaries.

On 6 July 2011 Macquarie was granted additional 500,000 warrants at a strike price of STG£ 41.8p in connection with the US$75 million facility. These are the final warrants due to Macquarie under the loan facility.

Total transaction costs, including share-based payment expense connected with the warrants granted, incurred in 2011 amounted to US$411,386 and are applied against the proceeds. The effective interest rate will be applied to the liability to accrete the transaction costs over the period of the loan.

Borrowing costs relating to drilling of development wells and construction of other oil and gas properties that have been capitalised within oil and gas properties during 2011 amount to US$Nil (2010: US$745,300). The average capitalisation rate employed to determine the amount of borrowing costs eligible for capitalisation was 17.21%. Only borrowing costs incurred up to September 2010 (start of production) were capitalised.

Certain oil and gas properties (wells, central processing facility, pipeline) together with shares in WorldAce Investments Ltd, shares in LLC Stimul T, certain bank accounts and inventories are pledged as a security for the loan facility agreement. The loan is repayable in full in May 2014.

The US$2 million loan from Arawak is an interest free loan to finance operations of LLC Lineynoye prior to the completion of the joint venture agreement relating to Licence 67. It is repayable on the earlier of 31 December 2011 or the date of completion of joint venture agreement at which stage there will be a receivable of an amount likely to exceed the US$2 million loan.

14.     Related party disclosures

Transactions between PetroNeft Resources plc and its subsidiaries, Stimul-T, Lineynoye, Granite, Pervomayka, Dolomite, World Ace Investments, Russian BD Holdings B.V. have been eliminated on consolidation. Details of transactions between the Group and other related parties are disclosed below.

In 2009 Stimul-T entered into a contract with LLC Tomskburneftegaz (TBNG) for the drilling of 9 wells in Pad 1 of the Lineynoye oilfield. Under this contract TBNG assumed substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract was up to US$9.5 million. Payments of US$259,734 (Full year ("FY") 2010: US$8,243,900) were made during 6 months 2011 in relation to this contract. As at 30 June 2011 the outstanding amount payable to TBNG is US$Nil (Year end ("YE") 2010: US$77,309). Vakha Sobraliev, a Director of PetroNeft, is the principal of TBNG. The contract is complete as at 30 June 2011.

In 2010 Stimul-T entered into a contract with TBNG for the drilling of well #1 of the Arbuzovskaya prospect. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract is US$2.1 million. Payments of US$582,520 were made during 6 months 2011 (FY 2010: US$1,587,817) in relation to this contract. As at 30 June 2011 the outstanding amount payable to TBNG is US$Nil (YE 2010: US$455,587). The contract is complete as at 30 June 2011.

14.     Related party disclosures (continued)

In 2010 Stimul-T entered into a contract with TBNG for the drilling of 9 wells in Pad 2 at the Lineynoye oilfield in 2011. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract is up to US$9.8 million. Payments of US$3,431,884 were made during 6 months 2011 (FY 2010: US$1,248,775) in relation to this contract, no advance payments are shown as at 30 June 2011 (YE 2010: US$1,248,775). As at 30 June 2011 the outstanding amount payable to TBNG is US$2,718,148 (YE 2010: US$Nil).

In 2010 Stimul-T entered into a contract with TBNG for the drilling of 8 wells in Pad 3 at the Lineynoye oilfield in 2011. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract is up to US$9.5 million. Payments of US$1,526,402 were made during 6 months 2011 (FY 2010: US$694,954) in relation to this contract, no advance payments are shown as at 30 June 2011 (YE 2010: US$694,954). As at 30 June 2011 the outstanding amount payable to TBNG is US$491,748 (YE 2010: US$Nil).

In 2010 Stimul-T entered into a contract with TBNG for the drilling of well #2 at the Kondrashevskoye oilfield and well #372 at the Sibkraevskaya prospect in 2011. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract is US$5.6 million. Payments of US$2,570,991 were made during 6 months 2011 (FY 2010: US$Nil) in relation to this contract. As at 30 June 2011 the outstanding amount payable to TBNG is US$577,767 (YE 2010: US$Nil).

In 2011 Stimul-T entered into a contract with TBNG for the drilling of well #1 at the North Varyakhskaya prospect in 2011 - 2012. This is a "turnkey" contract. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract is US$2.5 million. Payments of US$870,392 were made during 6 months 2011 (FY 2010: US$Nil) in relation to this contract. As at 30 June 2011 the amount of US$275,160 (YE 2010: US$Nil) is shown as advance payments in relation to this contract.

In 2011 Lineynoye entered into a contract with TBNG for the drilling of well #3 of Cheremshanskaya prospect and well #2bis of Ledovoye oilfield in 2011 - 2012. This is a "turnkey" contract. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the contract is US$4.6 million. Payments of US$1,270,631 were made during 6 months 2011 (FY 2010: US$Nil) in relation to this contract. As at 30 June 2011 the amount of US$1,099,377 (YE 2010: US$Nil) is shown as advance payments in relation to this contract.

An amount of US$5,901 (FY 2010: US$103,516) was received from TBNG during 6 months 2011 in relation to shared use of helicopter services, where the service provider billed the entire amount to Stimul-T. Balance of US$32,027 (YE 2010: US$5,529) is outstanding from TBNG at 30 June 2011.

An amount of US$8,954 (FY 2010: US$42,091) was received from TBNG during 2010 for fines for not meeting all contract conditions. Balance of US$Nil (YE 2010: US$8,389) is outstanding from TBNG at 30 June 2011. A total of US$6,961 (YE 2010: US$Nil) is outstanding from TBNG in relation to purchase of materials and other minor transactions as at 30 June 2011.

A total of US$4,432 (YE 2010: US$81,182) is outstanding to other parties, related to Vakha Sobraliev, a Director of PetroNeft for repair works on wells and transportation services. The amount of US$1,648 (YE 2010: US$Nil) is shown as advance payments. Payments of US$793,737 (FY 2010: US$444,644) were made to these entities during the year.

 

END

 

 

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