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China North East Petroleum Reports First Quarter Financial Results

Posted on: Friday, 15 May 2009, 07:30 CDT

HARBIN, China and NEW YORK, May 15 /PRNewswire-Asia-FirstCall/ -- China North East Petroleum Holdings Limited (the "Company") (OTC Bulletin Board: CNEH), an oil producing company in Northern China, today announced financial results for the first quarter ended March 31, 2009.

First Quarter 2009 Results

Revenues for the three months ended March 31, 2009 (the Current Quarter) were $8,899,223 compared to $10,823,974 for the three months ended March 31, 2008 (the Comparable Quarter), a decrease of $1,924,751, or 17.8%. This decrease was due to a decrease in the average price we received for our crude oil. The average oil price for the Current Quarter was $40.04, a 57.5% decrease from $94.27 for the Comparable Quarter. Our output of crude oil for the Current Quarter was 222,091 barrels compared to 114,862 barrels for the Comparable Quarter, an increase of 93.4%, which substantially offset the impact of lower oil prices. This increase in production was mainly due to: (i) an increase in the number of producing wells from 165 in the Comparable Quarter to 247 in the Current Quarter; (ii) refracturing and other technical improvements made to the existing wells; and (iii) implementation of a water injection network, which helped to maintain production levels at certain of our existing wells.

Cost of sales decreased by 33.8%, from $4,801,159 for the three months ended March 31, 2008 to $3,179,425 for the three months ended March 31, 2009. The decrease in cost of sales resulted primarily from a decrease in the oil surcharge paid to the PRC government, due to the decline in oil prices generally. For the Current Quarter, the Company paid an oil surcharge of $37,792 to the PRC government as compared to $2,211,320 paid for the Comparable Quarter. Under a regulation introduced in June 2006, a surcharge of 20% is imposed 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. This government oil surcharge tax is paid by the Company on a quarterly basis, following the end of each quarter. The significant decrease in the oil surcharge paid to the government was partially offset by an increase in depreciation of oil and gas properties. Depreciation increased from $1,874,692 in the Comparable Quarter to $2,624,254 in the Current Quarter, an increase of 40%. The increase in the depreciation of oil and gas properties was mainly attributable to the increase in proven oil reserves as of December 31, 2008, the higher volumes of oil produced and the increased depreciable production equipment base during the first quarter of 2009.

Operating expenses totaled $1,337,986 for the Current Quarter, compared to $635,949 for the Comparable Quarter, an increase of 110%. This increase is primarily a result of an increase of approximately $320,000 in selling, general and administrative costs, an increase of approximately $50,000 in amortization of deferred financing costs and approximately $330,000 in amortization of the discount on debenture from the Lotusbox secured debenture financing transaction consummated in late February 2008. SG&A costs increased largely due to non-cash charges associated with stock and option grants made to Directors and certain key employees in the second and third quarters of 2008. Amortization of the discount on the debenture was recognized for only one month of the Comparable Quarter, versus the full three months of the Current Quarter, which accounts for the increase.

Other expenses increased from $144,862 for the Comparable Quarter to $277,945 for the Current Quarter. This increase is primarily the result of increases in interest expense which increased from $119,697 in the Comparable Quarter to $280,000 in the current quarter.

Net income decreased by 32.7%, from $3,375,015 for the three months ended March 31, 2008 to $2,271,353 for the three months ended March 31, 2009, primarily as a result of the decrease in average selling price and increased non-cash expenses as described above.

EBITDA increased by 2% to $7,644,752 for the Current Quarter, compared to $7,503,613 for the Comparable Quarter. It represented 85.9% of the revenue. This increase is primarily the result of the significant decrease in the oil surcharge paid, improved production efficiency and reduced production costs.

Mr. Hongjun Wang, President of China North East Petroleum commented, "We are very pleased with the results of this quarter, especially in light of the global economic downturn. The plunge in oil prices - which have fallen dramatically from a record high of $147 per barrel last year, down to an average of approximately $40 per barrel in the first few months of this year - made 2009 a challenging year to start. However, CNEH's management views this challenging economic situation as an opportunity rather than a threat. With strategic production planning and wells drilled in 2008, the company achieved an 80.8% production increase compared with the same period last year, which offset the dramatic drop in oil prices during the first quarter. More importantly, CNEH achieved a profit margin of over 25.5% in the first quarter, and a very strong EBITDA result. It is a testament to CNEH's versatility in a difficult market that the decrease in profit margin of CNEH was relatively lower compared with other major multinational oil companies. We attribute our ability to maintain this profit margin to the higher efficiency of our operation and lower production costs. This demonstrates our strong execution capabilities, even during this challenging time.

We were satisfied to see the continuous improvements to our financial liquidity in the first quarter. We grew our cash position by 48.1% sequentially to nearly $20 million and notably improved our operating cash flow as well. Therefore, with sufficient cash on hand the company will continue to grow. We remain highly focused on exploring all possibilities to further expand our business presence and market position in the domestic private oil industry in China. We will do so by continuing to increase our production levels, seeking to acquire new oilfield leases and expanding our business into directly related areas of petroleum operations."

Mr. Wang continued, "heading into the second quarter, our management established a production and well drilling plan for the remainder of 2009. Our current plan is to drill an additional 48 wells in the next 10 months, with 5 wells expected to be drilled each month. If oil prices continue to recover, we may speed up the drilling and place more wells into production in the near future. With this growth plan in place, we expect to yield strong financial results ahead.

Finally, getting listed on an exchange is still a priority of the management, and we are currently working closely with the prospective exchange to continue the assessment and review of our listing application. We will update the shareholders on our progress when we have additional information that can be disclosed." 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.

CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) Three months ended March 31, 2009 2008 NET SALES $8,899,223 $10,823,974 COST OF SALES Production costs 514,400 712,305 Depreciation of oil and gas properties 2,624,254 1,874,692 Amortization of land use rights 2,979 2,842 Government oil surcharge 37,792 2,211,320 Total Cost of Sales 3,179,425 4,801,159 GROSS PROFIT 5,719,798 6,022,815 OPERATING EXPENSES Selling, general and administrative expenses 572,583 257,594 Professional fees 72,016 57,512 Consulting fees 57,680 81,630 Amortization of deferred financing costs 74,139 24,713 Amortization of discount on debenture 492,703 162,268 Depreciation of fixed assets 68,815 52,232 Total Operating Expenses 1,337,936 635,949 INCOME FROM OPERATIONS 4,381,862 5,386,866 OTHER INCOME (EXPENSE) Other expense (793) (2,311) Interest expense (280,000) (119,697) Imputed interest expense (12,248) (26,896) Interest income 15,096 4,042 Total Other Expense, net (277,945) (144,862) NET INCOME BEFORE INCOME TAXES 4,103,917 5,242,004 Income tax expense (1,419,819) (1,439,269) NET INCOME 2,684,098 3,802,735 Less: net income attributable to noncontrolling interests (412,745) (427,720) NET INCOME ATTRIBUTABLE TO CNEH COMMON STOCKHOLDERS 2,271,353 3,375,015 OTHER COMPREHENSIVE INCOME Total other comprehensive income 78,939 937,559 Less: foreign currency translation gain attributable to noncontrolling interests (7,894) (93,756) Foreign currency translation gain attributable to CNEH common stockholders 71,045 843,803 COMPREHENSIVE INCOME ATTRIBUTABLE TO CNEH COMMON STOCKHOLDERS $2,342,398 $4,218,818 Net income per share - basic $0.11 $0.18 - diluted $0.11 $0.16 Weighted average number of shares outstanding during the period - basic 20,784,080 19,224,080 - diluted 20,903,357 20,537,854 CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES (CNEH) Condensed Consolidated Balance Sheets March 31, December 31, 2009 2008 (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and cash equivalents $19,609,128 $13,239,213 Accounts receivable, net 4,068,879 4,230,080 Prepaid expenses and other current assets 747,444 781,121 Value added tax recoverable -- 311,240 Total Current Assets 24,425,451 18,561,654 PROPERTY AND EQUIPMENT Oil and gas properties, net 67,671,268 70,193,852 Fixed assets, net 1,775,458 1,684,377 Oil and gas properties under construction 715,527 714,629 Total Property and Equipment 70,162,253 72,592,858 LAND USE RIGHTS, NET 33,264 36,198 DEFERRED FINANCING COSTS, NET 864,959 939,098 TOTAL ASSETS $95,485,927 $92,129,808 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $11,256,389 $10,985,894 Current portion of secured debenture, net of discount 3,917,726 1,489,126 Other payables and accrued liabilities 1,023,285 742,264 Due to related parties 14,608 66,262 Income tax and other taxes payable 2,125,092 3,710,870 Due to a stockholder 965,162 738 Total Current Liabilities 19,302,262 16,995,154 LONG-TERM LIABILITIES Accounts payable 14,051,909 13,944,903 Secured debenture, net of discount 4,296,391 6,594,700 Deferred tax payable 590,266 762,405 Total Long-term Liabilities 18,938,566 21,302,008 TOTAL LIABILITIES 38,240,828 38,297,162 COMMITMENTS AND CONTINGENCIES -- -- EQUITY CNEH Stockholders' Equity Common stock, $0.001 par value, 150,000,000 shares authorized, 20,784,080 shares issued and outstanding 20,784 20,784 Additional paid-in capital 21,831,732 21,384,816 Deferred stock compensation (1,046,250) (1,248,750) Retained earnings Unappropriated 26,807,432 24,536,079 Appropriated 1,372,999 1,372,999 Accumulated other comprehensive income 3,324,113 3,253,068 Total CNEH Stockholders' Equity 52,310,810 49,318,996 Noncontrolling interests 4,934,289 4,513,650 TOTAL EQUITY 57,245,099 53,832,646 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,485,927 $92,129,808 CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2009 and 2008 (Unaudited) 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES Net income $2,271,353 $3,281,259 Adjusted to reconcile net income to cash provided by operating activities: Depreciation of oil and gas properties 2,624,254 1,874,692 Depreciation of fixed assets 68,816 52,232 Amortization of land use rights 2,979 2,842 Amortization of deferred financing costs 74,139 24,713 Amortization of discount on debenture 492,703 162,268 Amortization of stock option compensation 173,576 -- Warrants issued for services 48,680 29,755 Noncontrolling interests 420,639 521,476 Stocks issued for services -- 27,125 Stock-based compensation for service 202,500 -- Imputed interest expense 12,248 26,896 Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable 161,201 (1,128,492) Prepaid expenses and other current assets 33,677 (284,882) Value added tax recoverable 311,240 651,905 Deferred financing costs -- (1,186,229) Increase (decrease) in: Accounts payable 377,501 (5,650,202) Other payables and accrued liabilities 281,021 540,954 Income tax and other taxes payable (1,585,778) 2,314,493 Deferred tax payable (172,139) (67,655) Net cash provided by operating activities 5,798,610 1,193,150 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of oil and gas properties (13,880) (748,820) Purchase of fixed assets (157,769) (174,005) Additions to oil and gas properties under construction -- (211,709) Net cash used in investing activities (171,649) (1,134,534) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of secured debenture -- 15,000,000 Repayment of secured debenture (150,000) -- Increase in amount due to a stockholder 964,424 8,282 Decrease in amounts due to related parties (51,654) (1,552,308) Net cash provided by financing activities 762,770 13,455,974 EFFECT OF EXCHANGE RATE ON CASH (19,816) (854,883) NET INCREASE IN CASH AND CASH EQUIVALENTS 6,369,915 12,659,707 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,239,213 74,638 CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,609,128 $12,734,345 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income tax expense $2,482,717 $1,283,180 Interest expense $-- $11,204 For more information, please contact: United States: Chao Jiang EVP of Finance Tel: +1-212-307-3568 Email: chao.jiang@cnepetroleum.com

SOURCE China North East Petroleum Holdings Limited

Source: PR Newswire

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