China North East Petroleum Boosts 3Q Profits by 241%

China North East Petroleum has announced consolidated financial results for the third quarter ended September 30, 2008.

Third Quarter 2008 Results

Total sales for the third quarter were $19.1 million, a 227% increase compared to $5.8 million over the same period last year. This increase was due to an increase in crude oil production and the average price received for crude oil. Crude oil production for the third quarter doubled to 172,730 barrels from 86,222 barrels for the comparable quarter in the prior year. The increase in production was attributable to refracturing improvements and the implementation of water injection technology which improved efficiency of existing oil wells as well as from the addition of 30 new wells drilled during the third quarter of 2008.

The cost of sales in the third quarter increased by 214% to $9.2 million from $2.9 million for the three months ended September 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 third quarter increased 241% to $9.9 million from $2.9 million in the same period last year. Third quarter gross margin increased to 52.0% compared to 49.9% in the year ago period.

Operating expenses increased to $978 thousand, or 5.1% of sales, from $291 thousand, or 5.0% of sales, in the third quarter 2007. This is primarily a result of an increase in selling, general and administrative costs. Operating income increased 241% to $8.9 million, or 46.8% of total sales, compared to $2.6 million, or 44.9% of total sales, in the prior year period.

Net income for the third quarter increased 229% to $4.9 million, or $0.24 per diluted share, versus $1.5 million, or $0.08 per diluted share, in the third quarter of 2007.

Hongjun Wang, President of China North East Petroleum commented, "We were pleased to report another strong quarter of revenue and profit growth and are on plan to report record production increases in 2008. We added 30 new wells during the third quarter bringing our total oil well count to 218 wells through September.

"Most of these wells have been installed in the Qian'an 112 oilfield where the majority of our wells are located.
During the quarter, we were particularly satisfied to see significant improvements to our financial liquidity. We grew our cash position by 220% sequentially to nearly $8 million and our operating cash flow improved notably as well. Based on the reserves within our four existing oilfields (Qian'an 112, Hetingbao 301, Daan 34, Gudian 31), we believe we have the capability of drilling approximately 675 wells in the coming years and believe the cash flows derived from oil we yield from our existing wells can support much of our well expansion activities in these areas.

"Heading into the fourth quarter, we expect to be impacted by lower per- barrel oil prices which will likely impact revenue growth but believe we can sustain our full year net profit projection of $14.5-$15 million and diluted EPS of $0.62-$0.65 due to our strong production rates in the second half of the year as well as from a lower government oil surcharge rate.

"As oil prices decline, the amount of oil surcharge we are required to pay to the Chinese government declines. During this difficult market environment, we are keeping our operating costs low and continue to implement strict cost controls in all key areas of operation. We are encouraged with our opportunity in the market and continue to focus on expanding our position in China's oil market by adding more wells to our production capacity and seeking additional oil fields to lease and operate. We continue to expect very healthy quarterly revenue, EBITDA and profit growth, even at current oil price levels, and believe the growth plan we have in place will yield strong financial results ahead," concluded Wang.

Nine Month 2008 Results

Sales for the nine month period ended September 30, 2008 increased 273% to $44.1 million compared to $11.8 million for the nine month prior year period. Crude oil production through the first nine months of 2008 increased 143% to 422,788 barrels from 174,280 barrels for the comparable period in the prior year.

Gross profit for the first nine months was $23.6 million, a 292% increase over $6.0 million in the same period last year. Gross margin increased 260 basis points to 53.6% compared to 51.0% in the year ago period.
Operating expenses through the first nine months of 2008 were $2.0 million, or 4.4% of sales, compared to $939 thousand, or 8.0% of sales, in the prior year period. Operating income increased 326% to $21.7 million, or 49.2% of sales, compared to $5.1 million, or 43.1% of sales, in the prior year nine month period.

Net income increased by 223% to $9.8 million, or $0.54 per diluted share, from $3.0 million, or $0.12 per diluted share, for the nine months ended September 30, 2007.

2008 Financial Outlook

The Company expects 2008 crude oil production to total approximately 623,000 barrels and the anticipated number of oil producing wells is expected to total approximately 240 wells by year-end 2008. This is a 133% increase from 267,516 barrels produced in 2007, when the company finished the year with 157 wells.

Based on the Company's results through the first nine months of 2008, its drilling schedule for the remainder of 2008, and the current per-barrel price of oil received from PTR, the Company reiterates comfort with 2008 net income growth of 190%-200% to $14.5-$15.0 million, and fully diluted earnings per share growth of 195%-200% to $0.62-$0.65, compared to the 2007 fiscal year. The fully diluted EPS estimate range is based on a share count of approximately 24.0 million shares and assumes the exercise of all outstanding Company warrants.

Oil Pricing

Please note that CNEH's sole customer, PTR pays the Company a price per barrel which is calculated on a monthly basis, and is based upon 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, an international commodity and trading company. The grade of oil for which the company is paid typically trades at a discount to West Texas or London Brent crude.

Government Oil Surcharge

Under a regulation introduced in June 2006 by the Chinese government, a surcharge of 20% has been imposed on Chinese oil producers 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.