China North East Petroleum Achieves 65.5% Growth in Oil Production

China North East Petroleum has announced financial results for the second quarter ended June 30, 2009.

Second Quarter 2009 Results

Revenues for the three months ended June 30, 2009 (the Current Quarter) were $11,351,405 compared to $14,167,538 for the three months ended June 30, 2008 (the Comparable Quarter), a decrease of $2,816,133, or 20%. 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 $50.27, a 52% decrease from $105.08 for the Comparable Quarter. Our output of crude oil for the Current Quarter was 225,043 barrels compared to 135,194 barrels for the Comparable Quarter, an increase of 65.5%, 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 188 in the Comparable Quarter to 254 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 maintain production levels at certain existing wells.

Cost of sales decreased by 29%, from $6,465,580 for the three months ended June 30, 2008 to $4,569,551 for the three months ended June 30, 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 $580,375 to the PRC government as compared to $3,173,380 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 that exceeds $40 per barrel and a surcharge of 40% is imposed on the portion of the selling price of crude oil that exceeds $60 per barrel. This government oil surcharge tax is paid by the Company on a quarterly basis following the end of each quarter.

Operating expenses totaled $1,516,882 for the Current Quarter, compared to $1,093,552 for the Comparable Quarter, an increase of 39%. This increase is primarily the result of an increase of approximately $322,423 in selling, general and administrative costs ("SG&A"). 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, as well as an increase in professional fees from $39,818 in the Comparable Quarter to $153,032 in the Current Quarter as a result of recent business development activities.

Other expenses decreased from $322,716 for the Comparable Quarter to $294,673 for the Current Quarter. This decrease is primarily the result of a decrease in other expenses, which decreased from $105,601 in the Comparable Quarter to $1,008 in the current quarter.
Net income decreased by 27%, from $3,872,049 for the Comparable Quarter to $2,817,577 for the Current Quarter, primarily as a result of the decrease in average selling price and increased non-cash expenses as described above.

Mr. Hongjun Wang, President of China North East Petroleum, commented, "We are pleased with our second quarter financial results, especially in light of recent high market volatility. Although the global decline in oil prices caused the average three-month oil price to drop by 52% from $105.08 per barrel a year ago to $50.27 in the second quarter, we were able to achieve a 65.5% growth in oil production, which significantly offset the impact of the much lower oil price. This reflects our strong execution capabilities, even during this challenging economic time. More importantly, the Company achieved a profit margin of 25% with a strong EBITDA result of 77% in the second quarter. This further demonstrates NEP's versatility in this volatile market, considering the higher level of efficiency of our operations and significantly lower costs of production in comparison to those of major multinational oil companies."

Mr. Wang continued, "During this quarter, we successfully fulfilled our pledge to list China North East Petroleum's stock on the NYSE Amex, a major milestone in our Company's history. We believe this achievement both opens new doors for the Company to a much broader investor base and highlights our dedication to not only raise our visibility among the investment community but also to increase the liquidity and trading efficiencies of our common stock. We would like to thank our investors for their ongoing support and confidence in our team, and in our opportunities in the marketplace for continued growth in the years to come.

Mr. Wang concluded, "Looking forward as we head into the third quarter, despite minor delays caused by the rainy season in the second quarter, our management and the drilling teams are working at full throttle to speed up the well drilling. We remain confident in our ability to accomplish the original drilling program and to continue to increase our production levels. Furthermore, the Company's strong cash position provides us with a heavily favored position when applying for new oilfield leases in order to further expand our business presence and market position in the domestic private oil industry in China. The application has been submitted to PetroChina headquarters, and we will update the shareholders on our progress when we have additional information that can be disclosed. We continue to be optimistic about the Company's future and believe that the fundamental features of the Company will grow faster and stronger. We remain confident in our outlook for the remainder of 2009."
 

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