--3Q10 Revenue Increased 39% to $20.0 Million-- --3Q10 Operating Income Increased 32% $10.7 Million--
HARBIN, China and NEW YORK, Nov. 19, 2010 /PRNewswire-Asia-FirstCall/ --China North East Petroleum Holdings Limited (the "Company") (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.
ABOUT CHINA NORTH EAST PETROLEUM
China North East Petroleum Holdings Limited is an independent oil company that engages in the production of crude oil in Northern China. The Company is a pioneer in China's private oil exploration and production industry, and the first Chinese non-state-owned oil company trading on the NYSE Amex.
The Company has a guaranteed arrangement with the PetroChina to sell its produced crude oil for use in the China marketplace. The Company currently operates four oilfields in Northern China. The Company also recently added an oil service subsidiary through its acquisition of Song Yuan Tiancheng Drilling Engineering Co. Ltd. ("Tiancheng"). For more information about the Company, please visit http://www.cnepetroleum.com/ .
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: United States: Chao Jiang Senior Vice President, Corporate Finance Email: info@cnepetroleum.com Bill Zima ICR, Inc. Tel: +1-203-682-8233 (Financial tables on following pages) CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES ("NEP") Condensed Consolidated Balance Sheets As of September December 30, 31, 2010 2009 (Unaudited) (Audited) ----------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $50,520,855 $28,693,132 Accounts receivable, net 23,375,295 16,231,369 Prepaid expenses and other current assets 823,087 678,349 ------- ------- Total Current Assets 74,719,237 45,602,850 ---------- ---------- PROPERTY AND EQUIPMENT Oil properties, net 42,494,697 45,777,428 Fixed assets, net 15,097,941 16,466,117 Oil properties under construction 93,535 69,395 ------ ------ Total Property and Equipment 57,686,173 62,312,940 ---------- ---------- LAND USE RIGHTS, NET 610,242 630,387 GOODWILL 1,645,589 1,645,589 DEFERRED TAX ASSETS 7,892,582 7,538,868 DEPOSITS PAID FOR ACQUISITION OF LAND USE RIGHTS 810,678 - TOTAL ASSETS $143,364,501 $117,730,634 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $7,863,131 $13,373,640 Current portion of secured debenture - 5,625,000 Other payables and accrued expenses 844,770 1,165,494 Due to a related party 14,930 14,626 Due to a related company 28,367 144,796 Income tax and other taxes payable 5,026,931 4,930,202 Due to a stockholder 2,703,736 89,269 --------- ------ Total Current Liabilities 16,481,865 25,343,027 ---------- ---------- LONG-TERM LIABILITIES Secured debenture - 4,875,000 Warrants 14,007,665 39,528,261 ---------- ---------- Total Long-term Liabilities 14,007,665 44,403,261 ---------- ---------- TOTAL LIABILITIES 30,489,530 69,746,288 ---------- ---------- COMMITMENTS AND CONTINGENCIES EQUITY NEP Stockholders' Equity Common stock ($0.001 par value, 150,000,000 shares authorized, 29,505 27,936 29,504,860 shares issued and outstanding as of September 30, 2010 ; 27,935,818 shares issued and outstanding as of December 31, 2009) Additional paid-in capital 47,882,439 42,582,142 Retained earnings (deficits) Unappropriated 45,592,252 (7,995,947) Appropriated 2,524,055 2,524,055 Accumulated other comprehensive income 4,575,595 3,181,452 Total NEP Stockholders' Equity 100,603,846 40,319,638 Noncontrolling interests 12,271,125 7,664,708 ---------- --------- TOTAL EQUITY 112,874,971 47,984,346 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $143,364,501 $117,730,634 CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES ("NEP") Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) For the three months ended September 30, 2010 2009 ---- ---- (Restated) ---------- REVENUE Sales of crude oil $9,853,426 $14,403,921 Drilling revenue 10,132,841 - ---------- --- Total Revenue 19,986,267 14,403,921 ---------- ---------- COST OF REVENUE Production costs 932,168 1,103,163 Drilling costs 3,059,478 - Depreciation, depletion and amortization of oil properties 1,294,078 2,369,888 Depreciation of drilling equipment 481,385 - Amortization of land use rights 7,937 2,982 Government oil surcharge 1,495,917 1,655,000 --------- --------- Total Cost of Revenue 7,270,963 5,131,033 --------- --------- GROSS PROFIT 12,715,304 9,272,888 ---------- --------- OPERATING EXPENSES Selling, general and administrative expenses 1,801,405 855,138 Professional fees 160,000 105,225 Consulting fees 224,750 89,265 Depreciation of fixed assets 94,404 69,947 Impairment of oil properties - 1,456 --- ----- Total Operating Expenses 2,280,559 1,121,031 --------- --------- INCOME(LOSS) FROM OPERATIONS 10,434,745 8,151,857 ---------- --------- OTHER INCOME (EXPENSE) Other income 1,319 7,134 Other expense - (20,780) Interest expense (2,246) (236,931) Amortization of deferred financing costs - - Amortization of discount on debenture - - Imputed interest expense - (70,210) Interest income 30,996 25,141 Change in fair value of warrants 81,430 2,272,159 Loss on extinguishment of debt - - --- --- Total Other Income (expense), net 111,499 1,976,513 ------- --------- NET INCOME (LOSS) BEFORE INCOME TAXES 10,546,244 10,128,370 Income tax expense (2,851,199) (1,955,789) ---------- ---------- NET INCOME (LOSS) 7,695,045 8,172,581 Less: net loss ( income) attributable to noncontrolling interests (837,903) (704,386) -------- -------- NET INCOME (LOSS) ATTRIBUTABLE TO NEP COMMON STOCKHOLDERS 6,857,142 7,468,195 --------- --------- OTHER COMPREHENSIVE INCOME (LOSS) Total other comprehensive income 1,984,970 19,608 Less: foreign currency translation (gain) loss attributable to noncontrolling interests 692,332 (1,961) Foreign currency translation gain attributable to NEP common stockholders 2,677,302 17,647 --------- ------ COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NEP COMMON STOCKHOLDERS $9,534,443 $7,485,842 ========== ========== Net income (loss) per share - basic $0.23 $0.34 ===== ===== - diluted $0.22 $0.31 ===== ===== Weighted average number of shares outstanding during the period - basic 29,829,089 21,780,364 ========== ========== - diluted 31,334,453 24,025,976 ========== ========== For the nine months ended September 30, 2010 2009 ---- ---- (Restated) ---------- REVENUE Sales of crude oil $41,890,415 $34,654,549 Drilling revenue 34,731,330 - ---------- --- Total Revenue 76,621,745 34,654,549 ---------- ---------- COST OF REVENUE Production costs 3,024,158 2,769,762 Drilling costs 12,420,196 - Depreciation, depletion and amortization of oil properties 5,037,116 7,684,931 Depreciation of drilling equipment 1,436,443 - Amortization of land use rights 23,684 8,943 Government oil surcharge 6,498,555 2,273,167 --------- --------- Total Cost of Revenue 28,440,152 12,736,803 ---------- ---------- GROSS PROFIT 48,181,593 21,917,746 ---------- ---------- OPERATING EXPENSES Selling, general and administrative expenses 3,944,810 2,252,285 Professional fees 352,734 278,140 Consulting fees 449,500 159,260 Depreciation of fixed assets 285,826 209,748 Impairment of oil properties - 13,833,812 --- ---------- Total Operating Expenses 5,032,870 16,733,245 --------- ---------- INCOME(LOSS) FROM OPERATIONS 43,148,723 5,184,501 ---------- --------- OTHER INCOME (EXPENSE) Other income 10,839 7,134 Other expense (74,882) (22,581) Interest expense (26,980) (777,595) Amortization of deferred financing costs - (144,507) Amortization of discount on debenture - (670,492) Imputed interest expense - (120,127) Interest income 77,616 44,905 Change in fair value of warrants 25,520,596 (9,805,886) Loss on extinguishment of debt - (8,260,630) --- ---------- Total Other Income (expense), net 25,507,189 (19,749,779) ---------- ----------- NET INCOME (LOSS) BEFORE INCOME TAXES 68,655,912 (14,565,278) Income tax expense (11,626,300) (1,955,789) ----------- ---------- NET INCOME (LOSS) 57,029,612 (16,521,067) Less: net loss ( income) attributable to noncontrolling interests (3,439,993) (866,915) ---------- -------- NET INCOME (LOSS) ATTRIBUTABLE TO NEP COMMON STOCKHOLDERS 53,589,619 (17,387,982) ---------- ----------- OTHER COMPREHENSIVE INCOME (LOSS) Total other comprehensive income 2,699,752 88,980 Less: foreign currency translation (gain) loss attributable to noncontrolling interests (269,975) (8,898) Foreign currency translation gain attributable to NEP common stockholders 2,429,777 80,082 --------- ------ COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NEP COMMON STOCKHOLDERS $56,019,395 $(17,307,900) =========== ============ Net income (loss) per share - basic $1.84 $(0.81) ===== ====== - diluted $1.72 $(0.81) ===== ====== Weighted average number of shares outstanding during the period - basic 29,191,932 21,143,560 ========== ========== - diluted 31,188,901 21,143,560 ========== ========== CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES ("NEP") Condensed Consolidated Statements of Cash Flows (Unaudited) For the nine months ended September 30, 2010 2009 ---- ---- (Restated) ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $57,029,612 $(16,521,067) Adjusted to reconcile net income (loss) to cash provided by operating activities: Depreciation, depletion and amortization of oil properties 5,037,116 7,684,931 Depreciation of drilling equipment 1,436,443 Depreciation of fixed assets 285,826 209,748 Amortization of land use rights 23,684 8,943 Amortization of deferred financing costs - 144,507 Amortization of discount on debenture - 670,492 Amortization of stock option compensation 642,908 794,951 Loss on extinguishment of debt - 8,260,630 Change in fair value of warrants (25,520,596) 9,805,886 Impairment of oil properties - 13,833,812 Warrants issued for services 17,827 175,855 Stock issued for consulting services - 88,000 Stock-based compensation for employee service 1,346,667 607,500 Imputed interest expenses - 120,127 Gain on disposal of fixed assets (13,586) (7,134) Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable (7,143,926) (2,279,360) Prepaid expenses and other current assets (144,738) (3,206,650) Value added tax recoverable - 311,240 Deferred tax assets (353,714) (4,027,787) Increase (decrease) in: Accounts payable (5,510,509) (7,404,068) Other payables and accrued expenses (320,724) 163,052 Income tax and other taxes payable 96,729 1,242,325 Net cash provided by operating activities 26,909,019 10,675,933 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of oil properties (754,291) (3,053,668) Purchase of fixed assets (43,236) (185,369) Additions to oil properties under construction (161,372) - Proceeds on disposal of fixed assets 11,709 28,656 Deposits paid for acquisition of land use right (810,678) Cash outflow from acquisition of a subsidiary - (7,837,926) Net cash used in investing activities (1,757,868) (11,048,307) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance and sale in a public offering of common stock and warrants, net - 17,276,003 Repayment of secured debenture (8,696,260) (2,500,000) Proceeds from exercise of stock warrants and options 1,670,932 1,200 Increase in amount due to a stockholder 2,614,467 5,601,438 Increase (decrease) in due to a related party 304 (51,637) Decrease in due to a related company (116,429) - -------- --- Net cash (used in) provided by financing activities (4,526,986) 20,327,004 ---------- ---------- EFFECT OF EXCHANGE RATE ON CASH 1,203,558 (35,495) --------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 21,827,723 19,919,135 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,693,132 13,239,213 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $50,520,855 $33,158,348 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income tax expense $11,418,016 $5,975,876 =========== ========== Interest expense $234,740 $540,664 ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(1) On January 10, 2010, 867,438 shares of common stock at $2.35 per share was issued to settle the secured debenture regarding the warrant
(2) On March 29, 2010, 400,000 shares of common stocks valued at $3,232,000 were issued to the key management of Tiancheng; of which the Company recognized $1,346,667 as staff compensation expenses included in selling, general and administrative expenses for the nine months ended September 30, 2010
(3) In April 2010, a total of 29,865 shares of common stocks were issued in connection with cashless exercise of investor warrants
China North East Petroleum Holdings Ltd.
CONTACT: United States: Chao Jiang, Senior Vice President, Corporate
Finance, info@cnepetroleum.com; Bill Zima, ICR, Inc., +1-203-682-8233
Web Site: http://www.cnepetroleum.com/
