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China North East Petroleum Reports Fourth Quarter and Full Year 2008 Financial Results

Posted on: Monday, 30 March 2009, 07:30 CDT

HARBIN, China and NEW YORK, March 30 /PRNewswire-Asia-FirstCall/ -- China North East Petroleum Holdings Limited (the "Company") (OTC Bulletin Board: CNEH), an oil producing company in Northern China, today announced consolidated financial results for the fourth quarter and full year ended December 31, 2008.

Fourth Quarter 2008 Results

Total sales for the fourth quarter were $14.5 million, an 89% increase compared to $7.7 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 offset by lower oil prices. Crude oil production for the fourth quarter increased 139% to 223,068 barrels from 93,236 barrels for the comparable quarter in the prior year. The increase in production was primarily a result of the addition of 30 new wells drilled during the fourth quarter of 2008 compared to 13 in the fourth quarter of 2007.

Gross profit in the fourth quarter increased 206% to $13.8 million from $4.5 million in the same period last year. Fourth quarter gross margin increased to 95.1% compared to 58.8% in the prior year period primarily due to a one-time annual adjustment gain to its depreciation of oil and gas properties. According to SEC regulations, companies principally involved in the exploration and production of petroleum need to update their proven oil reserve estimate annually. The Company's estimates of proven reserves are made using available geological and reservoir data as well as production performance data. These estimates, made by the Company's engineers, and independently verified by a US geological engineering firm, are reviewed annually and revised, either upward or downward, as warranted by additional data. This independent annual audit was completed in the first quarter of 2009. Prior to the completion of this audit, the Company had been using 2007 proven reserve estimates to calculate the depreciation of oil and gas properties for the first three quarters of 2008, which is standard accounting procedure and fully meets existing SEC regulations. The recently completed annual audit concluded that the total proven oil reserve had increased significantly resulting in lower depreciation of oil and gas property and therefore requiring a one-time adjustment gain which incorporates the adjustment through the first three quarters of 2008 as well as for the fourth quarter period. The depreciation rate used in the fourth quarter will be used in future quarters until the Company updates its proven oil reserves which is expected at the end of 2009. The Company anticipates that the standard gross margin rate in the future will trend in line with historic quarterly gross margin results. More information regarding this topic can be found in the Company's 10-K filed today with the SEC.

Fourth quarter production costs were 2.5% of sales compared to 6.2% in the prior year fourth quarter period. The Company's government oil surcharge decreased 8.6% to $1.2 million in the fourth quarter compared to $1.36 million in the prior year fourth quarter period due to the lower oil price in the 2008 fourth quarter compared with the prior year period.

Fourth quarter operating expenses increased to $876 thousand, or 6.0% of sales, from $355 thousand, or 4.6% of sales, in the fourth quarter 2007. This is primarily a result of a significant increase in new wells drilled resulting in higher selling, general and administrative expenses. Operating income increased 215% to $12.9 million, or 89.0% of total sales, compared to $4.1 million, or 53.2% of total sales, in the prior year period.

Net income for the fourth quarter increased 262% to $7.6 million, or $0.37 per diluted share, versus $2.1 million, or $0.09 per diluted share, in the fourth quarter of 2007.

Full Year 2008 Results

Sales for the fiscal year ended December 31, 2008 increased 201% to $58.6 million compared to $19.5 million for the prior year. In 2008, the Company drilled 90 new oil wells in the four oilfields which are owned by the Company. The total number of producing wells increased from 157 in 2007 to 247 in 2008, a total increase of 57%. Total oil production for 2008 was 645,856 barrels, or approximately a 141% increase, as compared to 267,516 barrels in the same period in 2007 due to the increase in producing wells and the implementation of water flooding in the Qian'an 112 oil field. Oil prices in 2008 averaged approximately $94.29 per barrel, which represents an increase of 23% over 2007 levels of approximately $70.03 per barrel.

Gross profit for the full year was $37.4 million, a 255% increase over $10.5 million in the same period last year. Gross margin increased 980 basis points to 63.9% compared to 54.1% in the prior year.

Operating expenses for 2008 were $2.8 million, or 4.8% of sales, compared to $1.3 million, or 6.6% of sales, in the prior year period. Operating income increased 274% to $34.6 million, or 59.1% of sales, compared to $9.2 million, or 47.4% of sales, in the prior year period. The increase in operating expenses resulted primarily from higher selling and administrative expenses, higher depreciation due to increased fixed assets and an increase in fees related to financing activities.

Net income increased by 282% to $19.6 million, or $0.98 per diluted share, from $5.1 million, or $0.21 per diluted share, for the fiscal year ended December 31, 2007.

Mr. Hongjun Wang, President of China North East Petroleum commented, "2008 was a strong year for our business despite a significant drop in the price of oil toward the later part of the year. We exceeded our original production estimates for the year as well as the expected total number of wells drilled, which demonstrates our strong execution capabilities. We are still quite profitable on a per-barrel basis even with oil at current price levels and much of the cash flow we derive from our oil wells has been invested back into our operations to enhance our future growth. We were pleased to achieve sizeable increases to both operating income and operating margin and continue to focus our efforts on minimizing our operating expenses. We ended 2008 with EBITDA per share of $2.05. Our balance sheet showed significant improvement in 2008 compared to the prior year, highlighted by the sizeable increase in our cash position as well as our strong positive cash flows from operations."

"We remain highly focused on the further expansion of our production levels and are evaluating additional meaningful opportunities to expand our sales and margin performance. Our current plan is to install another 20-30 wells during the course of 2009, with approximately 5-10 wells expected to be drilled each quarter. The anticipated number of additional wells drilled could ramp higher if the price of oil continues to climb. As we plan our growth in 2009, we are focused on minimizing our operating expenses, which we believe will be on a level consistent with 2008. We have a solidly profitable business and a growing cash position which provides us with a unique opportunity to expand our presence in the northern China region. With oil prices at much lower levels compared to the prior year period, we will continue to evaluate obtaining additional oilfield leases and consider potential acquisition opportunities. We believe our ongoing growth initiatives will expand our market presence and further establish CNEH as an important player in the North China region. We are very excited by our future opportunities and look forward to sharing more of our plans with our shareholders as we progress through the year," concluded Wang.

Oil Pricing

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.

For more information, please contact: China: Yang Dio Zhang Chief Financial Officer Tel: +86-451-5558-0253 Email: dio.zhang@cnepetroleum.com United States: Chao Jiang Director of Finance Tel: +1-212-307-3568 Email: chao.jiang@cnepetroleum.com Bill Zima ICR, Inc. Tel: +1-203-682-8200 (Financial tables on following pages) CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 NET SALES $ 58,572,250 $ 19,482,069 COST OF SALES Production costs 3,847,775 2,872,990 Depreciation of oil and gas properties 6,172,422 3,562,265 Amortization of land use rights 11,718 10,711 Government oil surcharge 11,105,325 2,857,376 Recovery of deposit from a supplier previously written off -- (361,366) Total Cost of Sales 21,137,240 8,941,976 GROSS PROFIT 37,435,010 10,540,093 OPERATING EXPENSES Selling, general and administrative expenses 1,959,602 880,161 Professional fees 251,202 186,214 Consulting fees 396,330 108,500 Depreciation of fixed assets 229,434 187,766 Gain on disposal of fixed assets -- (68,131) Total Operating Expenses 2,836,568 1,294,510 INCOME FROM OPERATIONS 34,598,442 9,245,583 OTHER INCOME (EXPENSE) Other expense (112,517) (13,144) Interest expense (1,011,367) (81,434) Amortization of deferred financing costs (247,131) -- Amortization of discount on debenture (1,622,678) -- Imputed interest expense (50,587) (200,165) Interest income 38,829 1,760 Total Other Expense, net (3,005,451) (292,983) NET INCOME BEFORE TAXES AND MINORITY INTERESTS 31,592,991 8,952,600 Income tax expense (9,101,267) (3,097,649) Minority interests (2,909,686) (722,370) NET INCOME 19,582,038 5,132,581 OTHER COMPREHENSIVE INCOME Foreign currency translation gain 2,098,702 1,091,940 COMPREHENSIVE INCOME $ 21,680,740 $ 6,224,521 Net income per share - basic $ 0.99 $ 0.21 - diluted $ 0.98 $ 0.21 Weighted average number of shares outstanding during the year - basic 19,805,340 24,128,190 - diluted 19,924,929 24,128,190 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007 2008 2007 ASSETS CURRENT ASSETS Cash and cash equivalents $ 13,239,213 $ 74,638 Accounts receivable, net of allowance 4,230,080 4,852,633 Prepaid expenses and other current assets 781,121 398,046 Value added tax recoverable 311,240 651,905 Total Current Assets 18,561,654 5,977,222 PROPERTY AND EQUIPMENT Oil and gas properties, net 70,193,852 40,345,008 Fixed assets, net 1,684,377 885,474 Oil and gas properties under construction 714,629 2,550,058 Total Property and Equipment 72,592,858 43,780,540 LAND USE RIGHTS, NET 36,198 45,076 DEFERRED FINANCING COSTS, NET 939,098 -- TOTAL ASSETS $ 92,129,808 $ 49,802,838 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 10,985,894 $ 6,580,930 Current portion of secured debenture, net of discount 1,489,126 -- Other payables and accrued liabilities 742,264 1,020,980 Due to related parties 66,262 28,036 Note payable -- 273,444 Income tax and other taxes payable 3,710,870 2,687,449 Due to a stockholder 738 123,105 Total Current Liabilities 16,995,154 10,713,944 LONG-TERM LIABILITIES Accounts payable 13,944,903 15,467,661 Secured debenture, net of discount 6,594,700 -- Deferred tax payable 762,405 543,100 Due to a related party -- 3,118,085 Total Long-term Liabilities 21,302,008 19,128,846 TOTAL LIABILITIES 38,297,162 29,842,790 COMMITMENTS AND CONTINGENCIES -- -- MINORITY INTERESTS 4,513,650 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 December 31, 2008; 19,224,080 shares issued and outstanding as of December 31, 2007) 20,784 19,224 Additional paid-in capital 21,384,816 11,361,579 Deferred stock compensation (1,248,750) (27,125) Retained earnings Unappropriated 24,326,209 5,200,907 Appropriated 1,372,999 916,263 Accumulated other comprehensive income 3,462,938 1,364,236 Total Stockholders' Equity 49,318,996 18,835,084 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,129,808 $ 49,802,838 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 19,582,038 $ 5,132,581 Adjusted to reconcile net income to cash provided by operating activities: Depreciation of oil and gas properties 6,172,422 3,562,265 Depreciation of fixed assets 229,434 187,766 Amortization of land use rights 11,718 10,711 Amortization of deferred financing costs 247,131 -- Amortization of discount on debenture 1,622,678 -- Amortization of stock option compensation 336,978 -- Warrants issued for services 216,380 -- Minority interests 2,909,686 722,370 Stocks issued for services 27,125 108,500 Stock-based compensation for service 371,250 -- Imputed interest expense 50,587 200,165 Gain on disposal of fixed assets -- (68,131) Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable 622,553 (4,101,949) Prepaid expenses and other current assets (383,075) 527,312 Due from related parties -- 64,031 Value added tax recoverable 340,665 (204,302) Increase (decrease) in: Accounts payable 2,882,206 811,727 Other payables and accrued liabilities (278,716) (372,289) Income tax and other taxes payable 1,023,421 2,582,537 Deferred tax payable 219,305 340,348 Net cash provided by operating activities 36,203,786 9,503,642 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of oil and gas properties (29,206,040) (9,699,958) Purchase of fixed assets (957,449) (352,219) Additions to oil and gas properties under construction (1,712,449) (2,448,587) Proceeds from the disposal of fixed assets -- 166,728 Net cash used in investing activities (31,875,938) (12,334,036) CASH FLOWS FROM FINANCING ACTIVITIES Contribution to increased registered capital of a subsidiary by minority interests 479,000 -- Payment of deferred financing costs (1,186,229) -- Repayment of note payable (273,444) (110,743) 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 -- (Decrease) increase in amount due to a stockholder (122,367) 212,298 (Decrease) increase in amounts due to related parties (3,079,859) 4,286,530 Net cash provided by financing activities 10,079,101 4,362,473 EFFECT OF EXCHANGE RATE ON CASH (1,242,374) (1,471,187) NET INCREASE IN CASH AND CASH EQUIVALENTS 13,164,575 60,892 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 74,638 13,746 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,239,213 $ 74,638

SOURCE China North East Petroleum Holdings Limited

Source: PR Newswire

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