China North East Petroleum Reports Third Quarter 2008 Financial Results
-- 3Q08 Revenue Increases 227% to $19.1 Million -- -- 3Q08 Gross Profit Increases 241% to $9.9 Million -- -- 3Q08 Net Income Increases 229% to $4.9 Million -- -- Reiterates FY08 Net Income and Diluted EPS Forecasts --
HARBIN, China and NEW YORK, Nov.14 /Xinhua-PRNewswire-FirstCall/ — China North East Petroleum Holdings Limited (the “Company”) (BULLETIN BOARD: CNEH) , an oil producing company in Northern China, today announced consolidated financial results for the third quarter ended September 30, 2008.
Third Quarter 2008 Results
Total sales for the third quarter were $19.1 million, a 227% increase compared to $5.8 million over the same period last year. This increase was due to an increase in crude oil production and the average price received for crude oil. Crude oil production for the third quarter doubled to 172,730 barrels from 86,222 barrels for the comparable quarter in the prior year. The increase in production was attributable to refracturing improvements and the implementation of water injection technology which improved efficiency of existing oil wells as well as from the addition of 30 new wells drilled during the third quarter of 2008.
The cost of sales in the third quarter increased by 214% to $9.2 million from $2.9 million for the three months ended September 30, 2007. The increase in cost of sales resulted primarily from the increase in production, depreciation of oil and gas properties, and an increase in the absolute amount of oil surcharges as a result of increased production.
Gross profit in the third quarter increased 241% to $9.9 million from $2.9 million in the same period last year. Third quarter gross margin increased to 52.0% compared to 49.9% in the year ago period.
Operating expenses increased to $978 thousand, or 5.1% of sales, from $291 thousand, or 5.0% of sales, in the third quarter 2007. This is primarily a result of an increase in selling, general and administrative costs. Operating income increased 241% to $8.9 million, or 46.8% of total sales, compared to $2.6 million, or 44.9% of total sales, in the prior year period.
Net income for the third quarter increased 229% to $4.9 million, or $0.24 per diluted share, versus $1.5 million, or $0.08 per diluted share, in the third quarter of 2007.
Mr. Hongjun Wang, President of China North East Petroleum commented, “We were pleased to report another strong quarter of revenue and profit growth and are on plan to report record production increases in 2008. We added 30 new wells during the third quarter bringing our total oil well count to 218 wells through September. Most of these wells have been installed in the Qian’an 112 oilfield where the majority of our wells are located.
During the quarter, we were particularly satisfied to see significant improvements to our financial liquidity. We grew our cash position by 220% sequentially to nearly $8 million and our operating cash flow improved notably as well. Based on the reserves within our four existing oilfields (Qian’an 112, Hetingbao 301, Daan 34, Gudian 31), we believe we have the capability of drilling approximately 675 wells in the coming years and believe the cash flows derived from oil we yield from our existing wells can support much of our well expansion activities in these areas.
Heading into the fourth quarter, we expect to be impacted by lower per- barrel oil prices which will likely impact revenue growth but believe we can sustain our full year net profit projection of $14.5-$15 million and diluted EPS of $0.62-$0.65 due to our strong production rates in the second half of the year as well as from a lower government oil surcharge rate. As oil prices decline, the amount of oil surcharge we are required to pay to the Chinese government declines. During this difficult market environment, we are keeping our operating costs low and continue to implement strict cost controls in all key areas of operation. We are encouraged with our opportunity in the market and continue to focus on expanding our position in China’s oil market by adding more wells to our production capacity and seeking additional oil fields to lease and operate. We continue to expect very healthy quarterly revenue, EBITDA and profit growth, even at current oil price levels, and believe the growth plan we have in place will yield strong financial results ahead,” concluded Wang.
Nine Month 2008 Results
Sales for the nine month period ended September 30, 2008 increased 273% to $44.1 million compared to $11.8 million for the nine month prior year period. Crude oil production through the first nine months of 2008 increased 143% to 422,788 barrels from 174,280 barrels for the comparable period in the prior year.
Gross profit for the first nine months was $23.6 million, a 292% increase over $6.0 million in the same period last year. Gross margin increased 260 basis points to 53.6% compared to 51.0% in the year ago period.
Operating expenses through the first nine months of 2008 were $2.0 million, or 4.4% of sales, compared to $939 thousand, or 8.0% of sales, in the prior year period. Operating income increased 326% to $21.7 million, or 49.2% of sales, compared to $5.1 million, or 43.1% of sales, in the prior year nine month period.
Net income increased by 223% to $9.8 million, or $0.54 per diluted share, from $3.0 million, or $0.12 per diluted share, for the nine months ended September 30, 2007.
2008 Financial Outlook
The Company expects 2008 crude oil production to total approximately 623,000 barrels and the anticipated number of oil producing wells is expected to total approximately 240 wells by year-end 2008. This is a 133% increase from 267,516 barrels produced in 2007, when the company finished the year with 157 wells.
Based on the Company’s results through the first nine months of 2008, its drilling schedule for the remainder of 2008, and the current per-barrel price of oil received from PTR, the Company reiterates comfort with 2008 net income growth of 190%-200% to $14.5-$15.0 million, and fully diluted earnings per share growth of 195%-200% to $0.62-$0.65, compared to the 2007 fiscal year. The fully diluted EPS estimate range is based on a share count of approximately 24.0 million shares and assumes the exercise of all outstanding Company warrants.
Please note that CNEH’s sole customer, PTR pays the Company a price per barrel which is calculated on a monthly basis, and is based upon a lagged, daily price per barrel average for a relatively heavy, sour grade of crude oil that trades in Singapore. This daily price index is one of a large number of crude oil price indices maintained by Platts, an international commodity and trading company. The grade of oil for which the company is paid typically trades at a discount to West Texas or London Brent crude.
Government Oil Surcharge
Under a regulation introduced in June 2006 by the Chinese government, a surcharge of 20% has been imposed on Chinese oil producers on the portion of the selling price of crude oil which exceeds $40 per barrel and a surcharge of 40% is imposed on the portion of the selling price of crude oil which exceeds $60 per barrel.
ABOUT CHINA NORTH EAST PETROLEUM
China North East Petroleum Holdings Ltd. is engaged in the production of crude oil in Northern China. The Company has a guaranteed arrangement with the Jilin Refinery of PetroChina to sell its produced crude oil for use in the China marketplace. The Company currently operates four oilfields in Northern China.
Statements in this press release which are not historical data are forward-looking statements which involve known and unknown risks, uncertainties or other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, but are not limited to, those detailed in the company’s periodic filings with the Securities and Exchange Commission.
(Financial tables on following pages) CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (Unaudited) Three months ended Nine months ended September 30 September 30 2008 2007 2008 2007 $ 19,060,007 $ 5,826,506 $44,051,519 $ 11,804,007 NET SALES COST OF SALES Production costs 895,155 704,568 2,390,432 1,669,166 Depreciation of Oil and gas properties 3,774,327 1,361,732 8,155,321 2,601,561 Amortization of intangible assets 2,975 2,695 8,743 7,972 Government oil surcharge 4,480,955 848,315 9,865,655 1,500,902 Total Cost of Sales 9,153,412 2,917,310 20,420,151 5,779,601 GROSS PROFIT 9,906,595 2,909,196 23,631,368 6,024,406 OPERATING EXPENSES Selling, general and administrative expenses 793,479 194,697 1,339,404 694,103 Professional fees 42,850 26,245 140,180 46,245 Consulting fees 91,926 27,125 319,764 81,375 Depreciation of fixed assets 50,445 42,609 160,930 117,593 Total Operating Expenses 978,700 290,676 1,960,278 939,316 INCOME FROM OPERATIONS 8,927,895 2,618,520 21,671,090 5,085,090 OTHER INCOME (EXPENSE) Other income 809 -- 66,651 -- Other expense (2,000) (3,878) (107,601) (3,878) Interest expense (296,761) (28,186) (721,805) (51,290) Amortization of deferred financing costs (74,140) -- (172,992) -- Amortization of discount on debenture (486,803) -- (1,135,874) -- Imputed interest expense (16,794) (6,404) (49,535) (139,079) Interest income 4,238 615 34,204 1,105 Gain on disposal of fixed assets -- 460 -- 15,217 Recovery of deposit from a supplier previously written off -- 2,515 -- 358,609 Total Other Income (Expense), net (871,451) (34,878) (2,086,952) 180,684 NET INCOME BEFORE TAXES AND MINORITY INTERESTS 8,056,444 2,583,642 19,584,138 5,265,774 Income tax expense (2,390,961) (885,188) (5,695,498) (1,825,513) Minority interests (726,566) (198,959) (1,889,457) (399,836) NET INCOME 4,938,917 1,499,495 11,999,183 3,040,425 OTHER COMPREHENSIVE INCOME Foreign currency translation gain 152,651 235,873 2,020,632 450,633 COMPREHENSIVE INCOME $ 5,091,568 $ 1,735,368 $14,019,815 $ 3,491,058 Net income per share - basic $ 0.25 $ 0.08 $ 0.62 $ 0.12 - diluted $ 0.24 $ 0.08 $ 0.61 $ 0.12 Weighted average number of shares outstanding during the period - basic 19,987,123 19,224,080 19,480,284 25,780,857 - diluted 20,676,711 19,224,080 19,624,216 25,780,857 CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES Condensed Consolidated Balance Sheets September December 30, 2008 31, 2007 (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,762,017 $ 74,638 Accounts receivable, net 10,595,234 4,852,633 Prepaid expenses and other current assets 2,261,853 398,046 Current portion of deferred financing costs, net 296,557 -- Value added tax recoverable -- 651,905 Total Current Assets 20,915,661 5,977,222 PROPERTY AND EQUIPMENT Oil and gas properties, net 56,007,998 40,345,008 Fixed assets, net 1,462,703 885,474 Oil and gas properties under construction 784,851 2,550,058 Total Property and Equipment 58,255,552 43,780,540 LAND USE RIGHTS, NET 39,168 45,076 LONG-TERM DEFERRED FINANCING COSTS, NET 716,680 -- DEFERRED TAX ASSETS 209,102 -- TOTAL ASSETS $ 80,136,163 $ 49,802,838 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 10,806,009 $ 6,580,930 Current portion of secured debenture, net of discount 1,399,451 -- Other payables and accrued liabilities 825,947 1,020,980 Due to related parties 14,588 28,036 Note payable -- 273,444 Income tax and other taxes payable 7,605,514 2,687,449 Due to a stockholder 783,258 123,105 Total Current Liabilities 21,434,767 10,713,944 LONG-TERM LIABILITIES Accounts payable 7,783,956 15,467,661 Secured debenture, net of discount 6,197,571 -- Deferred tax payable -- 543,100 Due to a related party 486,714 3,118,085 Total Long-term Liabilities 14,468,241 19,128,846 TOTAL LIABILITIES 35,903,008 29,842,790 COMMITMENTS AND CONTINGENCIES -- -- MINORITY INTERESTS 3,014,421 1,124,964 STOCKHOLDERS' EQUITY Common stock ($0.001 par value, 150,000,000 shares authorized, 20,784,080 shares issued and outstanding as of September 30, 2008; 19,224,080 shares issued and outstanding as of December 31, 2007) 20,784 19,224 Additional paid-in capital 21,147,979 11,361,579 Deferred stock compensation (1,451,250) (27,125) Retained earnings Unappropriated 17,200,090 5,200,907 Appropriated 916,263 916,263 Accumulated other comprehensive income 3,384,868 1,364,236 Total Stockholders' Equity 41,218,734 18,835,084 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,136,163 $ 49,802,838 CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2008 and 2007 (Unaudited) 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,999,183 $ 3,040,425 Adjusted to reconcile net income to cash provided by operating activities: Depreciation of oil and gas properties 8,155,321 2,601,561 Depreciation of fixed assets 160,930 117,593 Amortization of land use rights 8,743 7,972 Amortization of deferred financing costs 172,992 -- Amortization of discount on debenture 1,135,874 -- Amortization of stock option compensation 163,402 -- Warrants issued for services 154,171 -- Minority interests 1,889,457 399,836 Stocks issued for services 27,125 81,375 Stocks-based compensation for service 168,750 -- Imputed interest expenses 49,535 139,079 Gain on disposal of fixed assets -- (15,217) Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable (5,742,601) (2,026,688) Prepaid expenses and other current assets (1,863,807) (262,501) Due from related parties -- 38,692 Value added tax recoverable 651,905 (1,200,623) Deferred financing costs (1,186,229) -- Deferred tax assets (209,102) -- Increase (decrease) in: Accounts payable (3,458,626) 3,781,456 Other payables and accrued liabilities (195,033) (2,824) Income tax and other taxes payable 4,918,065 2,123,234 Deferred tax payable (543,100) 363,774 Net cash provided by operating activities 16,456,955 9,187,144 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of oil and gas properties (18,300,636) (8,992,444) Purchase of fixed assets (668,233) (321,211) Additions to oil and gas properties under construction (649,786) (714,885) Proceeds on disposal of fixed assets -- 23,451 Net cash used in investing activities (19,618,655) (10,005,089) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuances of notes payable -- 798,128 Repayment of note payable -- (133,021) Proceeds from issuance of secured debenture 15,000,000 -- Repayment of secured debenture (750,000) -- Decrease in other loans payable -- (25,612) Proceeds from exercise of stock warrants 12,000 -- Increase in due to a stockholder 660,153 146,813 (Decrease) increase in due to related parties (2,644,819) 1,280,048 Net cash provided by financing activities 12,277,334 2,066,356 EFFECT OF EXCHANGE RATE ON CASH (1,428,255) (950,576) NET INCREASE IN CASH AND CASH EQUIVALENTS 7,687,379 297,835 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,638 13,746 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,762,017 $ 311,581 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income tax expense $ 4,932,518 $ 208,315 Interest expense $ 721,805 $ 51,290 SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING ACTIVITIES:
During 2008, the Company issued 360,000 shares of common stock valued at $1,620,000 as employee stock bonuses.
China North East Petroleum Holdings Ltd.
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