Nov 20 2010
China North East Petroleum Holdings Limited (NYSE Amex: NEP), a leading independent oil producing and oilfield services company in Northern China, today announced consolidated financial results for the third quarter ended September 30, 2010.
Revenue for the third quarter of 2010 increased 38.8% to $20.0 million from $14.4 million in the prior year period. This increase was primarily a result of the contribution from the Tiancheng drilling services business as well as from the higher price of oil compared to the prior year period. Tiancheng contributed $10.1 million of the revenue in the third quarter 2010. The average per barrel oil price for the third quarter was US$72.30, a 12% increase from US$64.33 for the third quarter of 2009. Total oil production in the third quarter 2010 was 135,473 barrels, a 40% decrease from 224,219 barrels in the prior year third quarter period. This decrease was primarily due to unexpected severe flooding that washed out roads disabling the passage of oil delivery trucks. Oil production was also slightly impacted by the natural depletion of production output among existing wells. In the third quarter 2010, three new oil wells were drilled in the Company's oilfields, bringing the total number of producing wells to 292 compared to 259 in the third quarter of the prior year period.
Third quarter 2010 gross profit increased 37.1% to $12.7 million, or 63.6% of revenue, from $9.3 million, or 64.4% of revenue, in the third quarter of 2009.
Third quarter 2010 operating expenses totaled $2.0 million compared to $1.1 million for the prior year third quarter period, an increase of 76%. The increase was primarily due to additional expenses related to new drilling operations and higher professional and consulting fees due to the company's recent restatement of financial results.
Operating income increased 31.8% year over year to $10.7 million, or 53.7% of revenue in the third quarter of 2010, from $8.2 million, or 56.6% of revenue in the third quarter of 2009.
Other expenses for the third quarter of 2010, which primarily included a change in fair value of warrants were $0.4 million compared to an income gain of $2.0 million in the prior year third quarter period, primarily due to a change in fair value of warrants. As a result, net income for the third quarter decreased 11% to $6.6 million, or $0.21 per diluted share, compared $7.4 million, or $0.31 per diluted share in the third quarter of 2009.
As of September 30, 2010, the Company had $50.5 million in cash and cash equivalents, compared to $28.7 million as of December 31, 2009. Total assets were $143.4 million and total liabilities were $30.5 million and stockholders' equity was $112.9 million as of September 30, 2010.
Mr. Jingfu Li, CEO of China North East Petroleum commented, "Our third quarter business performance was aided by the contribution of our drilling services business and a strong rise in oil prices when compared to the prior year period. While our per barrel oil production rate was lower, we believe our fourth quarter production will operate at a more normalized rate. Our Tiancheng oilfield services drilled 45 new wells in the third quarter and 156 wells through the first nine months of the year. This business now has eight oil drilling teams with the same number of drilling rigs and it is the largest of the four private contract drilling and service companies operating in PetroChina's Jilin oilfield. Tiancheng has additional contracts under negotiation which we expect will result in the full utilization of its rigs and steady sales growth for the next several quarters."
"There are now 292 producing wells within the four oilfields in which we operate, which represents less than half of the total number of wells we believe can be drilled in these four oilfields. We continue to view these four oilfields as viable growth opportunities for our business however, we have decelerated our well drilling plan year-to-date to instead focus on potential acquisition opportunities. We have identified several potential targets and believe that if we are successful with our acquisition efforts, it could result in significant contributions to our overall operations. We remain focused on minimizing our operating expenses and growing our cash position for the time being and look forward to updating our investors on any developments related to our acquisitions opportunities in the near future."
"With respect to our financial disclosure controls and procedures, the management team is actively working to improve the control environment and to implement procedures that will ensure the integrity, accuracy and timeliness of our financial statement preparation process going forward. We have utilized an outside consulting firm with specialized knowledge in financial accounting and specific knowledge of oil industry accounting to assist us with the review and restatement of past financial statements. We have also engaged Ernst & Young (China) Advisory Ltd. to assist us with SOX 404 compliance. Ernst & Young will also provide recommendations to our management for instituting necessary additional controls to enhance the risk management capability of our internal controls over financial reporting. In the third quarter, we also implemented financial reporting training programs for specific staff members, particularly with respect to accounting for non-cash items. We are making the effort to support these endeavors to ensure that our previous reporting delays do not recur."
"As we look at our business in the fourth quarter and beyond, we continue to evaluate opportunities to expand production, increase our scale, drill more wells, and expand into new regions. Through our efforts today, we believe China North East Petroleum can play a larger regional role in China's oil production and services industry in the future," concluded Mr. Li.
Nine Month 2010 Results
Net sales for the nine months ended September 30, 2010 were $76.6 million compared to $34.6 million for the prior year period. In the nine-month period, the Company drilled 3 new oil wells with 3 wells under construction in the four oilfields which are owned by the Company.
Total oil production for nine-month period was 561,875 barrels compared to 671,351 barrels in the same period in the prior year period. Oil prices in nine-month period averaged approximately $74.00 per barrel, which represents a 42% increase over prior year period levels of approximately $52.00 per barrel.
Gross profit for the nine-month period was $48.2 million, a 120% increase from $21.9 million in the same period last year. Gross margin was 62.9% compared to 63.2% in the prior year period.
Operating expenses for the nine-month period were $5.0 million compared to $16.7 million in the prior year period. This decrease was primarily due to a $13.8 million decrease in impairment of oil properties offset by higher consulting fees and overhead expenses associated with new drilling operations when compared to the prior year period.
Net income for the nine months ended September 30, 2010 were $53.6 million compared to net loss of $17.4 million for the same period in 2009. The increase was the result of the decrease of expense associated with the impairment of oil properties, loss on extinguishment of debt and the change in fair value of warrants as well as the increase of the total revenue generated from new added drilling services operation.
Oil Pricing
Please note that NEP's sole customer, PTR, pays the Company a price per barrel that is calculated on a monthly basis based on 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. Platts, a division of The McGraw-Hill Companies, is a leading global energy and metals information provider. The grade of oil for which the company is paid typically trades at a discount to West Texas or London Brent crude.
Source: China North East Petroleum Holdings Ltd.