China North East Petroleum Reports 2011 Third Quarter Financial Results

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China North East Petroleum Holdings Limited

Nov 10, 2011, 07:30 ET

HARBIN, China and NEW YORK, Nov. 10, 2011 /PRNewswire-Asia/ -- 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, 2011.

Revenue for the 2011 third quarter totaled $23.8 million compared to $24.3 million in the 2011 second quarter and $20.0 million in the 2010 third quarter. Total oil production in the third quarter of 2011 was 155,552 barrels compared to 161,498 barrels in the 2011 second quarter and 135,473 barrels in the 2010 third quarter period. In the third quarter, thirty wells were taken off-line, each for a period of 10-15 days, to conduct fracture work which reduced overall production activity, compared to twenty wells last quarter. As of September 30, 2011 the Company's total wells in production remained at 295 wells. Revenue from the sale of crude oil decreased 4.5% in the 2011 third quarter to $18.4 million from $19.3 million in the 2011 second quarter and increased 86.8% from $9.9 million in the 2010 third quarter. The average sales price per barrel during the 2011 third quarter was approximately US$114.0, a 4.2% decrease from US$119.0 during the 2011 second quarter and a 57.7% increase from US$72.3 during the 2010 third quarter.

The Company's oil drilling and service subsidiary, Tiancheng contributed $5.4 million of revenue in the 2011 third quarter compared to $5.0 million in the 2011 second quarter and $10.1 million in the 2010 third quarter. During the quarter Tiancheng completed 27 wells with a total drilling depth of 46,354 meters (~152,080 feet). Tiancheng's revenue in the third quarter was in-line with the prior quarter although lower than the 2010 third quarter due to PetroChina's decision to supply its own drilling materials instead of purchasing materials from the Company, which reduced the overall price of the drilling contracts with PetroChina. In addition, two of Tiancheng's eight drilling rigs were transported to Durimu which resulted in fewer wells drilled and a reduced overall drilling depth.

Gross profit for the 2011 third quarter was $10.4 million, a 31.3% decrease from $15.1 million in the 2011 second quarter and an 18.3% decrease from $12.7 million in the 2010 third quarter, primarily due to lower average contract prices. Gross margin in the 2011 third quarter was 43.7% compared to 62.3% in the 2011 second quarter and 63.6% in the 2010 third quarter.

Operating expenses for the third quarter were $1.7 million compared to $0.9 million in the 2011 second quarter and $2.3 million in the 2010 third quarter. The year-over-year decrease in operating expenses was primarily due to the decrease in selling, general and administrative expenses.

Operating income for the 2011 third quarter was $8.7 million, or 36.4% of revenue, compared to $14.3 million, or 58.8% of revenue in the 2011 second quarter, and $10.4 million, or 52.2% of revenue in the 2010 third quarter.

The Company had a $2.8 million non-cash gain in the quarter due to a change in the fair value of warrants compared to a $3.8 million non-cash gain in the 2011 second quarter and a $0.1 million non-cash gain in the 2010 third quarter.

Net income attributable to NEP common stockholders for the 2011 third quarter was $8.3 million, or $0.23 per diluted share, compared to $13.0 million, or $0.37 per diluted share, in the 2011 second quarter, and $6.9 million, or $0.22 per diluted share, in the 2010 third quarter.

Excluding the non-cash charge related to the fair value of warrants, 2011 third quarter net income was $5.6 million, or $0.15 per diluted share, compared to $9.2 million, or $0.26 per diluted share, in the 2011 second quarter and $6.8 million, or $0.22 per diluted share, in the 2010 third quarter.

Cash and cash equivalents increased in the third quarter to $88.0 million from $61.0 million as of December 31, 2010. Total assets grew to $218.7 million, total liabilities were $27.4 million and stockholders' equity was $191.3 million as of September 30, 2011.

Mr. Jingfu Li, CEO of China North East Petroleum commented, "Our third quarter business performance was slightly lower than the second quarter 2011 but higher than the third quarter 2010 with increased oil production output. In our oil production segment, we conducted fracture work on thirty wells, which was a higher level compared to the prior quarter and resulted in each of the thirty wells being off-line for an average of 10-15 days. This fracture work on our existing wells is necessary to maximize production. We expect to conduct fracture work on another 30 of our 295 wells in the fourth quarter. As we conduct this level of fracture work, we expect our regular quarterly operational output for our 295 current wells in production to be in the range of 145-155 thousand barrels. We also plan to resume basic levels of drilling activity in our Jilin oilfields with plans to drill 7-10 wells in the fourth quarter."

"Regarding our expansion initiatives, Durimu continues to move in the right direction and is showing tremendous potential. We successfully completed 2D seismic testing work in Durimu in the third quarter and were encouraged to see positive preliminary results. We have sent two drilling teams to the Durimu oilfield to prepare the exploration well drilling program and are prepared to deploy additional drilling teams to expedite test drilling if necessary."

"With over $88 million in cash at the end of the third quarter, we have an exceptionally strong cash position. While we remain focused on our expansion initiatives, we will continue to minimize our costs wherever possible. We are encouraged with our overall efforts to develop promising opportunities to support our revenue and profit growth in the years ahead."

Oil Pricing

Please note that NEP's sole customer for its oil production, PetroChina, 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.

Conference Call

Management will host a conference call at 9:30 am ET on Thursday, November 10th. Listeners may access the call by dialing # 1-719-325-4858. To listen to the live webcast of the event, please go to http://www.viavid.net. Listeners may access the call replay, which will be available through November 24th, by dialing # 1-858-384-5517; passcode: 8246582

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 five oilfields in Northern China. The Company also recently obtained exploration and drilling rights in the Durimu oilfield through its acquisition of Sunite Right Banner Shengyuan Oil and Gas Technology Development Co., Ltd. ("Shengyuan"). 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. Statements regarding our ability to realize future production volumes, realize success in our drilling and development activity and forecasts of legal claims, prices, future revenues and income and cash flows and other statements that are not historical facts contain predictions, estimates and other forward-looking statements. 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 a decrease in crude oil prices, delays in production caused by weather events such as flooding, delays and uncertainties that may be encountered in connection with seismic testing and test drilling in the Durimu oilfield, the anticipated benefits from the acquisition cannot be fully realized, the possibility that costs or difficulties related to the development of the Durimu oilfield will be greater than expected, and other risks described in the Company's annual report on Form 10-K for the year ended December 31, 2010 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:

China North East Petroleum US office
Tel: +1-909-610-2212

China North East Petroleum Investor Relations Department
Tel: +1-646-308-1707

(Financial Tables on Following Pages)


CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES ("NEP")
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
				For the three months ended September 30,		For the nine months ended September 30,
				2011	2010		2011	2010

REVENUE
	Sales of crude oil			$ 18,404,050	$ 9,853,426		$ 52,544,503	$ 41,890,415
	Drilling revenue			5,384,719	10,132,841		17,281,256	34,731,330
			Total Revenue	23,788,769	19,986,267		69,825,759	76,621,745

COST OF REVENUE
	Crude oil extraction costs			4,034,400	932,168		7,544,893	3,024,158
	Drilling costs			1,387,857	3,059,478		5,550,003	12,420,196
	Depreciation, depletion and amortization of oil properties			3,081,501	1,294,078		5,890,206	5,037,116
	Depreciation of drilling equipment			515,047	481,385		1,514,432	1,436,443
	Amortization of land use rights			8,695	7,937		25,173	23,684
	Government oil surcharge			4,366,785	1,495,917		12,025,129	6,498,555
			Total Cost of Revenue	13,394,285	7,270,963		32,549,836	28,440,152

GROSS PROFIT				10,394,484	12,715,304		37,275,923	48,181,593

OPERATING EXPENSES
	Selling, general and administrative expenses			940,843	2,026,155		2,120,076	4,394,310
	Professional fees			685,295	160,000		1,569,191	352,734
	Depreciation of fixed assets			102,979	94,404		264,306	285,826
			Total Operating Expenses	1,729,117	2,280,559		3,953,573	5,032,870

INCOME FROM OPERATIONS				8,665,367	10,434,745		33,322,350	43,148,723

OTHER INCOME (EXPENSE)
		Other income		267	1,319		14,754	10,839
		Other expense		(8,269)	-		(13,349)	(74,882)
		Interest expense		-	(2,246)		-	(26,980)
		Interest income		69,772	30,996		183,126	77,616
		Change in fair value of warrants		2,755,375	81,430		10,951,048	25,520,596
			Total Other Income, net	2,817,145	111,499		11,135,579	25,507,189

NET INCOME BEFORE INCOME TAXES				11,482,512	10,546,244		44,457,929	68,655,912
	Income tax expense			(2,412,101)	(2,851,199)		(9,185,664)	(11,626,300)
NET INCOME				9,070,411	7,695,045		35,272,265	57,029,612
	Less: net income attributable to noncontrolling interest			(757,720)	(837,903)		(2,694,598)	(3,439,993)
NET INCOME ATTRIBUTABLE TO NEP COMMON STOCKHOLDERS				8,312,691	6,857,142		32,577,667	53,589,619

OTHER COMPREHENSIVE INCOME
	Total other comprehensive income			1,468,896	1,984,970		4,403,065	2,699,752
	Less: foreign currency translation gain attributable to noncontrolling interest			12,975	692,332		(7,584)	(269,975)
	Foreign currency translation gain attributable to NEP common stockholders			1,481,871	2,677,302		4,395,481	2,429,777


COMPREHENSIVE INCOME ATTRIBUTABLE TO				$ 9,794,562	$ 9,534,444		$ 36,973,148	$ 56,019,396

Net income per share
- basic				$ 0.23	$ 0.23		$ 1.00	$ 1.84
- diluted				$ 0.23	$ 0.22		$ 0.96	$ 1.72

Weighted average number of shares outstanding
	during the period
- basic				35,547,717	29,829,089		32,576,094	29,191,932
- diluted				36,358,363	31,334,453		33,976,721	31,188,901


CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES ("NEP")
Condensed Consolidated Balance Sheets

						As of
					September 30,		December 31,
					2011		2010
					(Unaudited)		(Audited)

ASSETS
CURRENT ASSETS
		Cash and cash equivalents		$	88,035,030	$	60,974,007
		Accounts receivable			23,720,495		24,142,762
		Prepaid expenses and other current assets			2,002,248		434,094
			Total Current Assets		113,757,773		85,550,863

PROPERTY AND EQUIPMENT
		Oil properties, net			88,630,138		41,892,288
		Fixed assets, net			13,694,903		14,767,538
		Oil properties under construction			214,462		61,482
			Total Property and Equipment		102,539,503		56,721,308

LAND USE RIGHTS, NET					592,729		606,983
GOODWILL					1,827,582		1,645,589
DEFERRED TAX ASSETS					-		5,975,231

TOTAL ASSETS				$	218,717,587	$	150,499,974


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
		Accounts payable		$	3,871,728	$	4,156,349
		Other payables and accrued expenses			811,025		801,867
		Income tax and other taxes payable			7,874,283		5,076,074
		Due to a related party			15,637		15,124
		Due to an unrelated party			1,500,000		1,300,000
		Due to a stockholder			3,172,059		2,662,035
			Total Current Liabilities		17,244,732		14,011,449

LONG-TERM LIABILITIES
		Warrants			3,005,467		13,956,515
		Deferred tax liabilities			7,132,604		-
			Total Long-term Liabilities		10,138,071		13,956,515

TOTAL LIABILITIES					27,382,803		27,967,964

COMMITMENTS AND CONTINGENCIES					-		-

EQUITY
	NEP Stockholders' Equity
	Common stock , $0.001 par value, 150,000,000 shares authorized,35,584,860 and 29,604,860 shares issued, 35,558,810 and 29,604,860 shares outstanding as of September 30, 2011 and December 31, 2010				35,585		29,605
	Additional paid-in capital				75,421,936		50,070,524
	Retained earnings
	Unappropriated				82,631,755		50,059,932
	Appropriated				2,837,647		2,837,647
	Common stock held in treasury, at cost ( 26,050 and 0 shares as of September 30, 2011 and December 31, 2010)				(50,000)		-
	Accumulated other comprehensive income				12,013,996		7,618,515
			Total NEP Stockholders' Equity		172,890,919		110,616,223
	Noncontrolling interest				18,443,865		11,915,787
TOTAL EQUITY					191,334,784		122,532,010

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY				$	218,717,587	$	150,499,974


CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES ("NEP")
Condensed Consolidated Statements of Cash Flows
(Unaudited)
			For the nine months ended September 30,
			2011	2010

CASH FLOWS FROM OPERATING ACTIVITIES
	Net income		$ 35,272,265	$ 57,029,612
	Adjusted to reconcile net income to cash provided by
		operating activities:
		Depreciation, depletion and amortization of oil properties	5,890,206	5,037,116
		Depreciation of drilling equipment	1,514,432	1,436,443
		Depreciation of fixed assets	264,306	285,826
		Amortization of land use rights	25,173	23,684
		Change in fair value of warrants	(10,951,048)	(25,520,596)
		Stock-based compensation	1,061,794	2,007,402
		Gain on disposal of fixed assets	(14,754)	(13,586)
	Changes in operating assets and liabilities
		(Increase) decrease in:
		Accounts receivable	422,267	(7,143,926)
		Prepaid expenses and other current assets	(1,568,154)	(144,738)
		Deferred tax assets	408,071	(353,714)
		Increase (decrease) in:
		Accounts payable	(284,621)	(5,510,509)
		Other payables and accrued expenses	(84,540)	(320,724)
		Income tax and other taxes payable	2,798,209	96,729
		Net cash provided by operating activities	34,753,606	26,909,019

CASH FLOWS FROM INVESTING ACTIVITIES
		Addition to oil properties	(206,495)	(754,291)
		Addition of fixed assets	(23,220)	(853,914)
		Addition of oil properties under construction	-	(161,372)
		Proceeds from disposal of fixed assets	17,670	11,709
		Cash outflow for acquisition of a subsidiary, net	(10,254,276)	-
		Net cash used in investing activities	(10,466,321)	(1,757,868)

CASH FLOWS FROM FINANCING ACTIVITIES

		Repayment of secured debenture	-	(8,696,260)
		Proceeds from exercise of stock warrants and options	-	1,670,932
		Payment for treasury stock purchase	(50,000)	-
		Increase in amount due to a stockholder	510,024	2,614,467
		Increase in amount due to a related party	-	304
		Advance from an unrelated party	200,000	-
		Decrease in amount due to a related company	-	(116,429)
		Net cash provided (used in) by financing activities	660,024	(4,526,986)

EFFECT OF EXCHANGE RATE ON CASH			2,113,714	1,203,558

NET INCREASE IN CASH AND CASH EQUIVALENTS			27,061,023	21,827,723

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			60,974,007	28,693,132

CASH AND CASH EQUIVALENTS AT END OF PERIOD			$ 88,035,030	$ 50,520,855

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:
	Income tax expense		$ 8,123,828	$ 11,418,016

	Interest expense		$ -	$ 234,740