China North East Petroleum Claps for 246% Increase in 2Q Sales

China North East Petroleum Holdings Limited has announced consolidated financial results for the second quarter ended June 30, 2008.

Second Quarter 2008 Results

Total sales for the second quarter were $14.2 million, a 246% increase compared to $4.1 million over the same period last year. This increase was due to an increase in crude oil production and crude oil price. Crude oil production for the second quarter increased 119% to 135,193 barrels (18,319 tons) from 61,732 barrels (8,365 tons) for the quarter ended June 30, 2007. The increase in production was mainly because of (i) refracturing and other technical improvements made on the existing wells; (ii) the implementation of water injection technology which improved the efficiency of our existing wells by reducing the gradual decrease in production rates and (iii) 27 new wells drilled during the second quarter of 2008.

The cost of sales in the second quarter increased by 227% to $6.5 million from $2.0 million for the three months ended June 30, 2007. The increase in cost of sales resulted primarily from the increase in production, depreciation of oil and gas properties, and an increase in the absolute amount of oil surcharges as a result of increased production.

Gross profit in the second quarter increased 263% to $7.7 million from $2.1 million in the same period last year. Second quarter gross margin increased to 54.4% compared to 51.8% in the year ago period.

Operating expenses increased by 213% to $1.1 million from $349 thousand in the second quarter 2007. This is primarily a result of increases in (i) amortization of deferred financing costs; (ii) amortization of discount of debenture and (iii) consulting fees.

Operating income increased to $6.6 million compared to $1.8 million in the same period of the prior year. Operating margin expanded 340 basis points to 46.6% of sales in the second quarter of 2008 from 43.2% of sales in the second quarter of 2007.

Net income for the second quarter increased 201% to $3.8 million, or $0.19 per diluted share, versus $1.3 million, or $0.04 per diluted share, in the second quarter of 2007.

Hongjun Wang, President of China North East Petroleum commented, ''We continue to see strong results in 2008, with the second quarter yielding record production results in what is typically our slowest quarter of the year. We are confident that we will be able to further grow our revenue and profit in the second half of 2008.
Each of the four oilfields we operate contributed to our strong performance during the second quarter.

"The crude oil produced from each of these four locations is conveniently located near the oil depots of PetroChina, to whom we sell all of our product. As of the end of the second quarter, we added 27 new wells (23 of which currently produce oil), bringing our total to 192 wells (188 of which currently produce oil). The addition of the new wells was supported by cash flow generated from our existing wells and a portion of the $15 million financing that we closed in March 2008. In the second quarter, we also signed contract with a new drilling operator to drill another 60 oil wells. The majority of these new wells will be drilled in the Qian'an 112 oilfield, which is where most of our wells are located. Our goal is to have all 60 of these wells in the ground by the end of March 2009.

"The first half of 2008 laid the groundwork for what we believe will continue to be a strong year for the company. We continue to actively pursue new growth opportunities that can enhance our overall productivity and expect further revenue and earnings growth for the remainder of the year. Our installation of new wells and increased production output will allow us to produce strong results and maintain steady margins as oil prices continue to fluctuate. Additionally, our focus on maximizing shareholder value remains a top priority for our company. As part of this effort, we were pleased to move forward with some major corporate governance initiatives, including the election of an independent Board of Directors that would enable CNEH to further qualify for a listing on a major U.S. exchange by the end of the fiscal year. We have a great opportunity to further expand the presence of our operations and increase our productivity in the second half. The initiatives we have in place today will provide benefits to our shareholders in the months and years ahead,'' concluded Wang.

First Half 2008 Results

Sales for the six months ended June 30, 2008 increased 318% to $25.0 million compared to $6.0 million for the six month prior year period.

Gross profit for the first six months was $13.7 million, a 342% increase over $3.1 million in the same period last year. Gross margin increased 280 basis points to 54.9% compared to 52.1% in the year ago period.
Operating expenses in the first half 2008 were $1.7 million, or 6.9% of sales, compared to $648 thousand, or 10.8% of sales, in the prior year period.

Net income increased by 358% to $7.1 million, or $0.36 per diluted share, from $1.5 million, or $0.05 per diluted share, for the six months ended June 30, 2007.
 

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