China North East Petroleum Holdings Ltd. Announces Preliminary Q1 & Q2 2010 and FY09 Financial Results, 2008 Historical Financial Results

HARBIN, China and NEW YORK, Sept. 1 /PRNewswire-Asia-FirstCall/ -- China North East Petroleum Holdings Ltd. (the "Company" or "NEP") (NYSE Amex: NEP), a leading independent oil producer and oilfield services company in Northern China, today announced preliminary financial results for the financial quarters ended June 30, 2010, March 31, 2010 and full year 2009 as well as restated financial results for the cumulative three quarters of 2009 ended September 30, 2009 and full year 2008.

Preliminary Results for the Second Quarter Ended June 30, 2010

Preliminary revenue for the second quarter of 2010 increased 144% to $27.7 million from $11.4 million in the prior year period. Tiancheng contributed $12.3 million of the revenue in the first quarter 2010. In the second quarter 2010, no new oil wells were drilled in the Company's oilfields, bringing the total number of producing wells to 289. Total oil production in the second quarter 2010 was 198,776 barrels, an 11% decrease from 223,059 barrels in the prior year second quarter period. Oil prices in the second quarter of 2010 averaged RMB 3,884 per ton (USD$77 per barrel), a 53% increase from second quarter 2009 levels of RMB 2,538 per ton (US$50 per barrel). Preliminary second quarter 2010 gross profit increased 128.4% to $16.9 million, or 60.9% of revenue, from $7.4 million, or 65.0% of revenue, in the second quarter of 2009. Operating income increased 148.1% year over year to $16.0 million, or 57.7% of revenue, from $6.4 million, or 56.7% of revenue.

The Company incurred preliminary GAAP net income of $25.9 million, or $0.84 per diluted share, in the second quarter of 2010. GAAP net income included $15.1 million in non-cash gains related to a change in fair value of warrants.

As of June 30, 2010, the Company had $46.5 million in cash, compared to $34.2 million as of March 31, 2010 and $28.7 million as of December 31, 2009. Total assets were $139.4 million and total liabilities were $38.8 million and stockholders' equity was $100.6 million as of June 30, 2010.

Preliminary Results for the First Quarter Ended March 31, 2010

Preliminary revenues for the first quarter of 2010 increased 225% to $28.9 million from $8.9 million in the first quarter 2008 due to increased oil production and revenue generated by the Company's newly acquired contract oil drilling entity, Tiancheng. Tiancheng contributed $12.3 million of the revenue in the first quarter 2010. In the first quarter 2010, no new oil wells were drilled in the Company's oilfields, bringing the total number of producing wells to 289. Total oil production in the first quarter 2010 was 227,626 barrels, a 3% increase from 222,091 barrels in the prior year first quarter period. Oil prices in first quarter of 2010 averaged RMB 3,692 per ton (USD$73 per barrel), an 83% increase from first quarter 2009 levels of RMB 2,023 per ton (US$40 per barrel). Preliminary gross profit increased 253.5% year over year to $18.6 million, or 64.3% of revenue, from $5.3 million, or 59.2% of revenue. Preliminary operating income was $18.0 million, or 62.2% of revenue, compared to operating loss of ($9.4 million) in the prior year period.

The Company incurred preliminary GAAP net income of $19.8 million, or $0.63 per diluted share, in the first quarter of 2010. GAAP net income included $7.9 million in non-cash gains related to a change in fair value of warrants.

Preliminary Results for the Fourth Quarter Ended December 31, 2009

Preliminary fourth quarter 2009 revenue increased 106.6% to $30.0 million from $14.5 million in the prior year period. Tiancheng contributed $13.6 million of the revenue in the fourth quarter 2009. In the fourth quarter 2009, 8 new oil wells were drilled in the Company's oilfields, bringing the total number of producing wells to 289. Total oil production in the fourth quarter 2009 was 236,774 barrels, a 6% increase from 223,068 barrels in the prior year fourth quarter period. Oil prices in the 2009 fourth quarter averaged RMB 3,497 per ton (USD$69 per barrel), a 5% increase from fourth quarter 2008 levels of RMB 3,323 per ton (US$66 per barrel). Preliminary gross profit increased 77.7% year over year to $20.2 million, or 67.3% of revenue, from $11.4 million, or 78.3% of revenue. Preliminary operating income was $19.2 million, or 64.0% of revenue, compared to operating loss of ($2.7 million) in the prior year period.

The Company incurred a preliminary GAAP net loss of $5.0 million, or ($0.18) per diluted share, in the fourth quarter of 2009. GAAP net income included $18.7 million in non-cash charges related to a change in fair value of warrants.

Update Regarding Historical Financial Restatements

As previously stated in the Forms 8-K filed by the Company with the Securities and Exchange Commission on March 8, 2010 and February 23, 2010, the Company has determined that the Company's financial statements for the year ended December 31, 2008, and each interim quarter within that year, and for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 should no longer be relied upon and should be restated as a result of certain non-cash errors contained therein regarding the accounting for: (i) warrants issued in conjunction with a secured debenture on February 28, 2008, which warrants should have been classified according to Emerging Issues Task Force 00-19 as liability instruments rather than equity instruments; (ii) the change in the fair value of those warrants from the date of issuance through the end of the reporting period; (iii) effective interest expense arising from amortization of the discount to the carrying value of the secured debenture; (iv) the recording of warrants issued to investment consultants in connection with the secured debenture as deferred financing costs instead of consulting fees; (v) the amount of amortization of deferred financing costs associated with the issuance of that secured debenture; (vi) amounts payable to a consultant included in accrued liabilities; (vii) compensation issued to employees in the form of stock; (viii) depreciation, depletion and amortization of oil producing properties; (ix) ceiling test reduction of the net carrying value of oil producing properties; (x) income tax expense for the above items; and (xi) minority interests for certain of the above items. The restated results for the aforementioned periods are as follows:

Restated Results for the Nine Month Period Ended September 30, 2009

In the first nine months of 2009, restated revenue was $34.7 million compared to $44.1 million in the prior year period. Gross profit was $21.9 million, or 63.2% of revenue and operating income was $5.2 million, or 15.0% of revenue.

The Company incurred a GAAP net loss of $17.1 million, or ($0.81) per diluted share in the first nine months of 2009. The GAAP net loss included $30.7 million in non-cash charges related to the impairment of oil and gas properties, change in fair value of warrants and loss on extinguishment of debt.

Preliminary Results for the Year Ended December 31, 2009

For the year ended December 31, 2009, preliminary revenue increased 10.4% to $64.7 million from $58.6 million in 2008. Preliminary gross profit increased 20.4% to $42.1 million, or 65.1% of revenue, from $35.0 million, or 59.8% of revenue, in the prior year. Preliminary operating income increased 34.2% to $24.4 million, or 37.7% of revenue, from $18.2 million, or 31.0% of revenue, in 2008.

The preliminary GAAP net loss attributable to the Company was ($22.1 million), or ($0.99) per diluted share, compared to net income of $10.5 million, or $0.53 per share, in the prior year. The preliminary GAAP net loss included $49.5 million in non-cash charges related to the impairment of oil and gas properties, change in fair value of warrants and loss on extinguishment of debt.

Restated Results for the Year Ended December 31, 2008

For the year ended December 31, 2008, revenue increased 200.6% to $58.6 million from $19.5 million in 2007. Gross profit increased 232.0% to $35.0 million, or 59.8% of revenue, from $10.5 million, or 54.1% of revenue, the year before. Operating income increased 96.6% to $18.2 million, or 31.0% of revenue, from $9.2 million, or 47.5% of revenue, in 2007.

GAAP net income attributable to the Company was $10.5 million, or $0.53 per diluted share, compared to net income of $5.1 million, or $0.21 per share, in the prior year. GAAP net income included $17.5 million in non-cash charges related to the impairment of oil and gas properties, deferred financing cost, discount on debenture, and also included $4.5 million in non-cash gains related to the change in fair value of warrants.

Additional information regarding the Company's 2009 and 2008 financial results can be found in the Company's 10-Q and 10-K filings filed with the SEC. The Company intends to report its 10-Q for the 2010 first and second quarter periods as well as its 2009 10-K within the next week and will provide additional information on its business and operations at that time.

(1) Adjusted EBITDA is a non-GAAP measurement that the Company uses as a metric to provide information about NEP's operating trends. NEP defines adjusted EBITDA as net income before discontinued operations, interest expense, interest income, income taxes, depreciation and amortization, non-controlling interest, non-cash loss on extinguishment of debt, non-cash change in fair value of derivative (warrants) and non-cash charges for impairment of oil properties.

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, including but not limited to those relating to the Company's or management's intentions, beliefs, expectations, hopes, projections, assessment of risks, estimations, plans or predictions for the future, including the impact of the restatement, timing of filings with the SEC and other statements that are not historical facts are forward-looking statements that are based on current expectations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that these expectations will prove correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements include delays and uncertainties that may be encountered in connection with the restatement, final audits and reviews by the Company and its auditors, and other risks described in the Company's annual report on Form 10-K for the year ended December 31, 2008 and its other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. Investors should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and the Company undertakes no duty to update any forward-looking statement.

    For more information, please contact:

    Bill Zima
    ICR, Inc.
    Tel: +1-203-682-8233

SOURCE China North East Petroleum Holdings Ltd.