Nighthawk Energy Regulatory News (HAWK)

28 March 2014

NIGHTHAWK ENERGY PLC

("Nighthawk" or "the Company")

Preliminary Results for the year ended 31 December 2013

Pre-exceptionals Operating Profit of $14.0 million

Nighthawk, the US focused oil development and production company (AIM: HAWK and OTCQX: NHEGY), announces its preliminary results for the year ended 31 December 2013.

Financial Highlights

· Twelve-fold increase in revenue to US$26.2 million (full year 2012:US$2.2 million)

· Operating Profit before exceptional items of US$14.0 million, compared to a 2012 full year loss of US$3.9 million

· Normalised EBITDA1 of US$17.8 million, a US$20 million turn-round from 2012 full year normalised EBITDA of negative US$2.9 million

· Capital investment in drilling and development of US$22.4 million (full year 2012: US$12.7m)

· Operating Cash-flow of US$14.4 million (full year 2012: outflow US$3.4m)

Operational highlights

· Gross oil sales of 358,294 barrels compared to 29,812 barrels in full year 2012

· Net oil sales of 290,664 barrels (Nighthawk average net revenue interest2 of 81.1%)

· Nine new wells drilled with six wells successfully brought into production and two further successful producing wells drilled after year-end

· Average daily gross oil production increased from 280 barrels/day ("bbls/day") in January 2013 to 1,556 bbls/day in December 2013

· Acquisition of remaining 25% working interest in Smoky Hill and Jolly Ranch projects successfully completed

Stephen Gutteridge, Chairman of Nighthawk, said;

"2013 was a truly transformational year for the operational performance of Nighthawk. We successfully brought 6 new wells into production taking average production from 280 bbls/day in January to 1,556 bbls/day by year end. This progress fed through into operating cash flow of $14.4 million. The outlook for the Company in 2014 is promising with planned investment in both production development and exploration prospects."

Definitions

1. Normalised EBITDA is operating profit adjusted for depreciation, amortisation, exceptional expenses and a gain on stepped acquisition.

2. Net revenue interest (NRI) - Nighthawk's share of oil, gas, and associated hydrocarbons produced, saved, and marketed, after satisfaction of all royalties, overriding royalties, or other similar burdens on or measured by production of oil, gas, and associated hydrocarbons

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NIGHTHAWK ENERGY PLC

Preliminary Results for the year ended 31 December 2013

Chairman's Statement

2013 was a highly successful year for Nighthawk. Gross oil sales from the Smoky Hill and Jolly Ranch projects in Colorado totalled 358,294 barrels compared to 29,812 barrels in 2012. Gross average daily production increased from 280 bbls/day in January 2013 to 1,556 bbls/day in December 2013 and is currently around 1,900 bbls/day.

Nighthawk's net sales of 290,664 barrels generated annual revenues of US$26.15 million and combined with our low level of operating costs and overheads, this generated an operating profit of US$14.0 million (pre-exceptionals and one-off gain) and operating cash-flow of US$14.4 million.

Nighthawk's business philosophy has been to re-invest cash-flow as quickly as possible in development and exploration and 2013 was a very active year for the Group (being Nighthawk and its subsidiary companies) with US$22.4 million invested in drilling and development. Nine new wells were drilled in 2013, seven of them on the Arikaree Creek oil-field which was discovered in late 2012 and was producing from a single well, the Steamboat Hansen 8-10, in January 2013. Two additional wells were drilled at Arikaree Creek early in 2014, and the result from this drilling program is that we now have eight producing wells at Arikaree Creek with a number of additional locations as drilling targets for 2014. Well performance has been good, cumulative field production has already exceeded 480,000 barrels, and the original Steamboat Hanson 8-10 well has now produced over 148,000 barrels of oil with no water production.

In addition to the development drilling at Arikaree Creek, Nighthawk continued to invest in further exploration of its 250,000 net acreage position. The John Craig 1-2 well encountered oil in the Pennsylvanian Morrow formation and is currently adding to the production from Arikaree Creek. A wildcat exploration well, the Jackson Hole 1-32 spudded at the end of the year and has provided valuable information on the geology of Nighthawk's relatively unexplored northern acreage.

A key feature of Nighthawk's development approach is to acquire and analyse as much geo-scientific data as possible. During 2013, Nighthawk acquired and shot over 750 miles of 2D seismic data, obtained substantial cores from three well-bores including the Jackson Hole 1-32, ran multiple logs on all wells drilled, and obtained regular pressure tests and fluid level checks on producing wells at Arikaree Creek.

Analysis of this data has identified three potentially significant areas of exploration potential.

The Arikaree Creek field is structurally uplifted and Nighthawk has identified a number of other similarly uplifted structures. At least two of these structures are scheduled to be drilled in the first half of 2014.

The Mississippian formations cored and logged in the Arikaree Creek wells and at the Jackson Hole 1-32 well have identified characteristics which are indicative of a potential horizontal conventional/unconventional play across Mississippian age formations. In some instances, there is evidence of hydro-thermal alteration of the formations, creating areas of high porosity and permeability. Although it is still too early to assess the potential of this play, it is an exciting development, which Nighthawk plans to take to the next stage in 2014 with further drilling and geo-science work, which may include a horizontal well to demonstrate proof of concept.

The third area of potential remains the Pennsylvanian age formations such as the Cherokee, Marmaton and Morrow formations. Whilst production from these formations has been inconsistent, they are consistently shown to be oil-bearing across Nighthawk's acreage. Other operators in the area have successfully developed these formations and there is clearly merit in continuing to test ways of establishing consistent production from these zones. During the first half of 2014, Nighthawk expects to learn more about the potential in these zones from the farm-out drilling program for three wells agreed in 2013.

Other accomplishments in 2013 included maintaining the lease-holding position of around 250,000 net acres, and the acquisition of the remaining 25% working interest in the Smoky Hill and Jolly Ranch projects from Running Foxes Petroleum Inc. This acquisition was completed in July for a consideration of US$12 million, financed by a short-term loan from the Company's largest shareholder.

In November 2013 the Company completed a Capital Reduction process which will facilitate a return of capital to shareholders if the Company finds itself in a position to consider this option.

Over the past two years, Nighthawk's US operation has recovered to become a sizeable operating company with significant potential and the outlook for 2014 is promising with planned investment in both production development and exploration prospects.

Finally, I would like to thank our shareholders, suppliers and my colleagues for their support during the year.

Stephen Gutteridge

Chairman

Chief Financial Officer's Statement

The year ended 31 December 2013 was another period of significant investment for the Group primarily in the drilling of development wells at the Arikaree Creek field in the Smoky Hill project area. This proved transformational for the Group's production levels and operational cashflow, particular in the second half of the year.

These results represent our first full year report to 31 December and the comparatives given are for the previously audited six month period ended 31 December 2012.

Financial highlights

1. Normalised operating profit is operating profit adjusted for exceptional administrative expenses and a gain on stepped acquisition.

2. Normalised EBITDA is operating profit adjusted for depreciation, amortisation, exceptional administrative expenses and a gain on stepped acquisition.

Revenues

Group revenues for the year were US$26.2 million (six months ended 31 December 2012: US$1.6 million; year ended 31 December 2012: US$2.2 million), an approximate twelve-fold increase on the prior calendar year.

Gross production and oil sales during the year were driven to record levels by six new wells being drilled and brought into production from late May onwards, primarily at the Arikaree Creek field. Gross oil sales for the year averaged 982 bbls/day, this average being driven primarily by the second half of the year average of 1,494 bbls/day (six months ended 31 December 2012: 126 bbls/day). The average sales price per barrel in the year was US$91.05 per barrel (six months ended 31 December 2012: US$80.71 per barrel).

Costs

Cost of sales during the year was US$7.7 million (six months ended 31 December 2012: US$1.0 million; year ended 31 December 2012: US$1.8 million) which represents principally direct costs associated with wells that have been classified as commercial producers.

On-going administrative expenses during the year were US$4.4 million (six months ended 31 December 2012: US$1.9 million; year ended 31 December 2012: US$4.2 million), a small increase on the prior calendar year during a period when the Group grew its operations aggressively.

Exceptional administrative expenses of US$1.8 million comprise impairments made in the period following decisions to plug and abandon three legacy wells. The gain on stepped acquisition of US$3.2 million arose during the year following Nighthawk's acquisition of the remaining 25% working interest in the Jolly Ranch and Smoky Hill Projects that it did not already own.

Profit for the year

The Group reported its first profit after tax with a profit of US$20.1 million for the year (six months ended 31 December 2012: loss US$2.4 million; year ended 31 December 2012: loss US$21.7 million). Profit after tax in the year is after recognising a deferred tax asset of US$7.0 million (six months ended 31 December 2012: US$nil), which is further explained below.

Normalised EBITDA for the year was US$17.8 million (six months ended 31 December 2012: loss US$0.7 million; year ended 31 December 2012: loss US$2.9 million) reflecting the highly profitable nature of the Group's oil producing assets. This is also represented by normalised EBITDA per gross barrel sold across all the Group's wells which was US$56.92/bbl in the second half of the year (a margin of over 60% on sales price per barrel), or US$49.72/bbl for the year as a whole (55% margin on sales price) (six months ended 31 December 2012: loss US$31.41/bbl; year ended 31 December 2012: loss US$96.00/bbl).

Taxation

Group income tax expense in the US and the UK for the year was US$0.2 million (six months ended 31 December 2012: US$nil) representing Federal Alternative Minimum Tax. During the period, the Group generated sufficient intangible drilling and other allowable expenses in the US to more than fully offset the profit generated. 

The Group carries net operating losses in the US, some of which are immediately available for offset against US taxation charges. As a result, a deferred tax asset of US$7.0 million was recognised in the year in relation to net operating losses expected to be used over the next two financial years.

Cash flow, investment and liquidity

Cash inflow from operating activities for the year ended 31 December 2013 was US$14.4 million (six months ended 31 December 2012: outflow US$0.2 million; year ended 31 December 2012: outflow US$3.4 million) and was after cash-based cost of sales and administrative expenses of US$9.0 million (six months ended 31 December 2012: US$2.1 million; year ended 31 December 2012: US$4.5 million).

Cash flow used in investing activities during the year of US$34.1 million (six months ended 31 December 2012: US$9.1 million; year ended 31 December 2012: US$21.0 million) principally comprised capital expenditure of US$22.4 million, the majority of which was applied to the drilling and completion of new wells, and cash consideration of US$12.0 million in connection with the acquisition in July 2013 of the remaining 25% of the Jolly Ranch and Smoky Hill Projects that the Group did not already own.

Cash flow from financing activities during the year totalled US$19.2 million (six months ended 31 December 2012: US$2.5 million; year ended 31 December 2012: US$25.2 million) and comprised principally US$17.0 million raised via debt facilities, US$5.8 million raised via a convertible loan note, US$3.0 million in debt repayments and US$0.9 million in debt servicing payments.

At 31 December 2013, the Group held cash balances of US$1.7 million (31 December 2012: US$2.3 million).

Since the period end financing activities have included a further loan and the sale of a WTI call option resulting in a premium being paid to the Company, collectively raising approximately US$2.5 million. Additionally, the Group entered into a factoring agreement with Amegy Bank that allows it the flexibility to bring forward oil sales revenue receipts in any particular month. 

Looking forward, with its growing producing well count and strong operational cashflow, the Group is now actively considering debt financing options with various parties both to refinance existing debt commitments and to provide additional funding for development drilling. The providers of US$14.0 million of existing loans to the Group have agreed in principle to extend the maturity dates on such loans whilst debt refinancing solutions are negotiated and finalised.

Capital reduction

In November 2013, the Company concluded a capital reduction whereby the Company's capital share premium and merger reserves were cancelled with an equivalent amount recognised in distributable reserves. The purpose of this exercise was to offer the Company the ability and flexibility to buy back ordinary shares and/or pay dividends in future if it is considered desirable to do so in light of continued operational success, income and cash flow.

Shareholders' equity

As at 31 December 2013 there were 947,685,420 ordinary shares of 0.25 pence each in issue.

Additionally, as at 31 December 2013 a total of up to 457,640,909 new ordinary shares may be issued pursuant to the exercise of share options, warrants or convertible loan notes. 

Cautionary Statement

These results contain certain judgements/assumptions and forward-looking statements and assumptions that are subject to the normal risks and uncertainties associated with the exploration, development and production of hydrocarbons. Whilst the Directors believe that expectations reflected throughout these results are reasonable based on the information available at the time of approval of these results, actual outcomes and results may be materially different due to factors either beyond the Group's reasonable control or within the Group's control but, for example, following a change in project plans or corporate strategy. Therefore absolute reliance should not be placed on these judgements/assumptions and forward-looking statements.

Richard Swindells

Chief Financial Officer

Consolidated Income Statement

for the year ended 31 December 2013

Consolidated Statement of Comprehensive Income and Expenditure

for the year ended 31 December 2013

Consolidated Balance Sheet

as at 31 December 2013

Consolidated Statement of Changes in Equity

for the year ended 31 December 2013

Consolidated Cash Flow Statement

for the year ended 31 December 2013

Notes

1. Basis of Preparation

The figures for the year ended 31 December 2013 have been extracted from the unaudited statutory financial statements for the year that have yet to be delivered to the Registrar of Companies and on which the auditor has yet to issue an opinion. The financial information attached has been prepared in accordance with the recognition and measurement requirements of international financial reporting standards (IFRS) as adopted by the EU. The accounting policies applied in the year ended 31 December 2013 are consistent with those applied in the financial statements for the period ended 31 December 2012.

The financial information for the year ended 31 December 2013 and the period ended 31 December 2012 does not constitute statutory financial information as defined in Section 434 of the Companies Act 2006 and does not contain all of the information required to be disclosed in a full set of IFRS financial statements. This announcement was approved by the Board of Directors on 28 March 2014. The auditor's report on the financial statements for 31 December 2012 was unqualified, and did not contain a statement under either Section 498 (2) or 498 (3) of the Companies Act 2006 and did not include reference to any matters to which the auditor drew any attention by way of emphasis. The financial statements for the period ended 31 December 2012 have been delivered to the Registrar.

2. Revenue

An analysis of the Group's revenue for the year (excluding finance income) from continuing operations is as follows:

3. Exceptional items

During the year Nighthawk acquired a further 25.0% working interest in the Jolly Ranch Project taking its working interest in all leases and wells to 100.0%. The consideration paid was $12.0 million in cash, which fair value informed the revaluation on stepped acquisition of the existing 75% working interest - resulting in a gain on stepped acquisition being recognised at 31 December 2013.

During the year decisions were taken to plug and abandon the Craig 15-32H, the Craig 10-28 and the Craig 8-1 wells. As a result of these decisions, the associated assets have been fully impaired as at 31 December 2013.

4. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

Due to the Group's reported loss in the prior period share options and warrants were not taken into account when determining the weighted average number of ordinary shares in issue during the year and therefore the basic and diluted earnings per share were the same.

Subsequent to the balance sheet date, 1,818,182 shares were issued as a result of a loan note being converted on 3 January 2014, and 1,800,000 shares were issued as a result of share options being exercised on 18 February 2014.

These transactions would not have a material impact on the number of ordinary shares outstanding and no impact on the number of potential ordinary shares outstanding at the end of the year.

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

Taking the Company's share options and warrants into consideration in respect of the Company's weighted average number of ordinary shares for the purposes of diluted earnings per share, is as follows:

5. Property, Plant and Equipment

The only impairment which has been indicated during the current financial period in relation to Property, Plant and Equipment, relates to the decision taken to plug and abandon the Craig 15-32H well. Consequentially, a full impairment of the remaining value in this well has been recognised.

At the balance sheet date there were no further indications of impairment in respect of any of the projects.

US$3,936,897 of the depreciation charge for the year has been capitalised within intangible assets (period ended 31 December 2012: US$1,767,450). 

6. Intangible Assets

Management review each exploration project for indication of impairment at each balance sheet date. Such indications would include written off wells and relinquishment of development acreage.

The only impairments, which have been indicated during the current financial period in relation to Exploration Costs, relate to the decisions taken to plug and abandon the Craig 15-32H, the Craig 10-28 and the Craig 8-1 wells. Consequentially, a full impairment of the remaining value in these wells has been recognised.

At the balance sheet date there were no further indications of impairment in respect of any of the projects.

7. Cash Flow from Operating Activities

- End -