China North East Petroleum Holdings has announced financial results for the first quarter ended March 31, 2009.
First Quarter 2009 Results
Revenues for the three months ended March 31, 2009 (the Current Quarter) were $8,899,223 compared to $10,823,974 for the three months ended March 31, 2008 (the Comparable Quarter), a decrease of $1,924,751, or 17.8%. This decrease was due to a decrease in the average price we received for our crude oil. The average oil price for the Current Quarter was $40.04, a 57.5% decrease from $94.27 for the Comparable Quarter. Our output of crude oil for the Current Quarter was 222,091 barrels compared to 114,862 barrels for the Comparable Quarter, an increase of 93.4%, which substantially offset the impact of lower oil prices. This increase in production was mainly due to: (i) an increase in the number of producing wells from 165 in the Comparable Quarter to 247 in the Current Quarter; (ii) refracturing and other technical improvements made to the existing wells; and (iii) implementation of a water injection network, which helped to maintain production levels at certain of our existing wells.
Cost of sales decreased by 33.8%, from $4,801,159 for the three months ended March 31, 2008 to $3,179,425 for the three months ended March 31, 2009. The decrease in cost of sales resulted primarily from a decrease in the oil surcharge paid to the PRC government, due to the decline in oil prices generally. For the Current Quarter, the Company paid an oil surcharge of $37,792 to the PRC government as compared to $2,211,320 paid for the Comparable Quarter. Under a regulation introduced in June 2006, a surcharge of 20% is imposed on the portion of the selling price of crude oil which exceeds $40 per barrel and a surcharge of 40% is imposed on the portion of the selling price of crude oil which exceeds $60 per barrel. This government oil surcharge tax is paid by the Company on a quarterly basis, following the end of each quarter. The significant decrease in the oil surcharge paid to the government was partially offset by an increase in depreciation of oil and gas properties. Depreciation increased from $1,874,692 in the Comparable Quarter to $2,624,254 in the Current Quarter, an increase of 40%. The increase in the depreciation of oil and gas properties was mainly attributable to the increase in proven oil reserves as of December 31, 2008, the higher volumes of oil produced and the increased depreciable production equipment base during the first quarter of 2009.
Operating expenses totaled $1,337,986 for the Current Quarter, compared to $635,949 for the Comparable Quarter, an increase of 110%. This increase is primarily a result of an increase of approximately $320,000 in selling, general and administrative costs, an increase of approximately $50,000 in amortization of deferred financing costs and approximately $330,000 in amortization of the discount on debenture from the Lotusbox secured debenture financing transaction consummated in late February 2008. SG&A costs increased largely due to non-cash charges associated with stock and option grants made to Directors and certain key employees in the second and third quarters of 2008. Amortization of the discount on the debenture was recognized for only one month of the Comparable Quarter, versus the full three months of the Current Quarter, which accounts for the increase.
Other expenses increased from $144,862 for the Comparable Quarter to $277,945 for the Current Quarter. This increase is primarily the result of increases in interest expense which increased from $119,697 in the Comparable Quarter to $280,000 in the current quarter.
Net income decreased by 32.7%, from $3,375,015 for the three months ended March 31, 2008 to $2,271,353 for the three months ended March 31, 2009, primarily as a result of the decrease in average selling price and increased non-cash expenses as described above.
EBITDA increased by 2% to $7,644,752 for the Current Quarter, compared to $7,503,613 for the Comparable Quarter. It represented 85.9% of the revenue. This increase is primarily the result of the significant decrease in the oil surcharge paid, improved production efficiency and reduced production costs.
Mr. Hongjun Wang, President of China North East Petroleum commented, "We are very pleased with the results of this quarter, especially in light of the global economic downturn. The plunge in oil prices -- which have fallen dramatically from a record high of $147 per barrel last year, down to an average of approximately $40 per barrel in the first few months of this year -- made 2009 a challenging year to start. However, CNEH's management views this challenging economic situation as an opportunity rather than a threat. With strategic production planning and wells drilled in 2008, the company achieved an 80.8% production increase compared with the same period last year, which offset the dramatic drop in oil prices during the first quarter. More importantly, CNEH achieved a profit margin of over 25.5% in the first quarter, and a very strong EBITDA result. It is a testament to CNEH's versatility in a difficult market that the decrease in profit margin of CNEH was relatively lower compared with other major multinational oil companies. We attribute our ability to maintain this profit margin to the higher efficiency of our operation and lower production costs. This demonstrates our strong execution capabilities, even during this challenging time.
"We were satisfied to see the continuous improvements to our financial liquidity in the first quarter. We grew our cash position by 48.1% sequentially to nearly $20 million and notably improved our operating cash flow as well. Therefore, with sufficient cash on hand the company will continue to grow. We remain highly focused on exploring all possibilities to further expand our business presence and market position in the domestic private oil industry in China. We will do so by continuing to increase our production levels, seeking to acquire new oilfield leases and expanding our business into directly related areas of petroleum operations."
Mr. Wang continued, "heading into the second quarter, our management established a production and well drilling plan for the remainder of 2009. Our current plan is to drill an additional 48 wells in the next 10 months, with 5 wells expected to be drilled each month. If oil prices continue to recover, we may speed up the drilling and place more wells into production in the near future. With this growth plan in place, we expect to yield strong financial results ahead.
Finally, getting listed on an exchange is still a priority of the management, and we are currently working closely with the prospective exchange to continue the assessment and review of our listing application. We will update the shareholders on our progress when we have additional information that can be disclosed," concluded Wang.
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