NLG.L Regulatory News (NLG)

16 May 2005 06:00

16 May 2005 NELSON RESOURCES LIMITED REPORTS FIRST QUARTER RESULTS, CONTINUED GROWTH IN PRODUCTION AND REVENUENelson Resources Limited (TSX / AIM: NLG), a leading independent exploration andproduction company operating in Kazakhstan, today reports its results for the three months ending March 31, 2005. All amounts are expressed in U.S. dollars unless otherwise indicated.HIGHLIGHTS==========Financial---------Year on year: - Oil revenue up 273% to $98.5 million (Q1 2004 $26.4 million)Quarter on quarter: - Operational profit increased 259% to $57.4 million (Q4 2004 $16.0 million)- Cash flow from operating activities increased 126% to $35.1 million (Q4 2004 $15.5 million) - Average price per barrel sold $40.72 (Q4 2004 $34.06)- Net profit after tax of $35.8 million, a ten-fold increase over the profit for the full year 2004 of $3.7 millionOperational------------ Average quarterly production net to Nelson's equity interest of 27,439 bopd, an increase of 28% quarter-on-quarter (Q4 2004: 21,362 bopd) and 141% year-on-year (Q1 2004 11,374 bopd)- Completion of acquisition of 50% stake in the Arman field, in partnership with Shell- 14 new wells drilled during quarter (four at Alibekmola, seven at North Buzachi, three at Karakuduk) despite harsh winter conditions- Total producing well fund of 171 wells, with 19 water injection wells across all fields- Since quarter end, gross production exceeding 30,000 bopd at Alibekmola and 10,000 bopd at KarakudukNick Zana, Nelson's Chief Executive Officer, commented, "Nelson continues to make excellent progress with its strategy of growth organically through field development, and by acquisition. We completed the acquisition of the 50% interest in Arman and received our first cash dividend from this investment during the quarter. We welcome our new partnership with Shell and expect the Arman field to be a steady cash flow and profit producer for the future."I am pleased with the progress of the Nelson Group towards establishing ourselves as a leading independent oil company operating in Kazakhstan. I am also encouraged by our recent discussions with Kazmunaigas, regarding converting our option to an equity interest in Zhambai LLP, which holds the exploration licence for two large offshore blocks in the Caspian Sea. "I should also add that Nelson and all of our operating units work closely with the relevant government regulatory bodies to receive and maintain approvals for work programs for all of our properties. We expect that these programs will continue to comply with all legislative and regulatory requirements, including the requirements for utilization of associated gas. I am confident that Nelson will be able to continue to operate its fields in accordance with national regulations and to achieve continuing growth in value for our shareholders."FINANCIAL REVIEW================================================================================================(In thousands of U.S. dollars, Three months ended except per barrel amounts) March 31 2005 2004--------------------------------------------------------------------------------Crude oil prices ($/bbl) Brent 47.71 31.91 Net realization 40.72 27.04Revenues 98,468 26,398Gross operating profit* 66,559 14,459EBIT** 62,743 588Net profit/(loss) after tax 35,845 (9,845)Debt 181,011 172,318Cash on hand 62,593 45,539 -------- --------Net debt after cash 118,418 126,779Not included in gross operating profit: Other compensation costs 9,105 (9,729) Derivative instruments (5,320) (4,019) Depreciation and amortization (12,921) (4,142)================================================================================* Gross operating profit is revenues less costs of production, sales and transportation expenses and general and administrative expenses** EBIT, earnings before interest and taxes, is gross operating profit less other compensation costs and depreciation and amortizationOverview--------A comparison of Q1 2005 with Q1 2004 illustrates how significantly the Company has grown in the past year through successful organic expansion and development of its productive properties and through acquisition. The achievements were manifested in significant increases in assets, production and revenues, and profits over the year. Nelson has achieved excellent results in Q1, realizing acash flow surplus after investing activities, this despite the effects that severe weather conditions during the first months of 2005 had on production and marketing. This surplus has been applied to reduce outstanding debt. Operating Activities--------------------Net after-tax earnings increased to a profit of $35.8 million in Q1 2005 compared with a loss of $9.8 million in Q1 2004 and a loss of $6.5 million in Q42004. The comparison of net earnings is distorted by differences in the statutory accounting treatment of derivative contracts and, more significantly as discussed below, changes in the value of incentive stock options granted to employees. Cash flow from operating activities rose to $35.1 million for Q1 2005, compared with $1.0 million for Q1 2004.In comparison with Q1 2004, revenues in Q1 2005 increased 273% to $98.5 million,reflecting both the 148% growth in quantities of crude oil sold and a 51% increase in average realized selling price to $40.72/bbl, in Q1 2005, from the $27.04/bbl average of Q1 2004. Gross operating profit (defined as revenues lessoperating costs - production, transportation and marketing, and general and administration costs) increased 360% to $66.6 million, due to the increase in quantities sold, marginally reduced by an 8% increase in operating costs to $13.04/bbl - the result of higher costs of production at new acquisitions relative to KOA. Net after-tax earnings increased to a profit of $35.8 million in Q1 2005 compared with a loss of $9.8 million in Q1 2004. Net after-tax profit for Q1 2005 is boosted by a non-cash credit to earnings of $9.1 million, related to a change in the value of employee stock options, compared to the after-tax loss for Q1 2004 that included a non cash charge related to employee stock options of$9.7 million.Revenues increased by 11% quarter-on-quarter from $88.3 million, reflecting a 21% increase in the average selling price realized to $40.72/bbl from the $34.06/bbl average of Q4 2004, marginally enhanced by the inclusion of the Armanfield in Q1 2005, and partly negated by a 7% decline in the quantity of crude oil sold between the periods. Gross operating profit for Q1 2005 of $66.6 million represented an increase of 24% from $53.7 million in the fourth quarter of 2004, attributable largely to the increase in realized selling prices and thenon-recurrence of certain operating costs recorded in Q4 2004. The net after-tax profit of $35.8 million in Q1 2005 compares with a loss of $6.5 million in Q4 2004. This includes a $9.1 million non-cash credit related to employee stock options, whereas in Q4 2004, net after-tax results included a charge of $18.7 million related to these options.Investing Activities--------------------In Q1 2005, virtually all of the $20.0 million cash used in investing activitieswas applied to the gathering of seismic data, drilling, and development of the field infrastructure, the purchase price of Arman having been funded in December2004. The level of investment in field activities was somewhat constrained by the inclement weather, but continued the trend of increasing investment in fielddevelopment - when compared with $23.5 million in the last quarter and $10.9 million in Q1 2004 - as the Company seeks to increase production through organicgrowth, as well as selective acquisition.Financing Activities--------------------For Q1 2005, the company realized a net surplus cash flow after investing activities of $15.1 million. This surplus was applied to a reduction in funded debt by $6.2 million after the payment of interest and cash amortization of calloptions sold.MANAGEMENT DISCUSSION AND ANALYSIS==================================A full Management's Discussion and Analysis document is available on the Company's website, www.nelsonresources.com, and on SEDAR, www.sedar.com. The document can also be obtained on application from the Company.RESTATEMENT OF 2004 QUARTERLY REPORTS=====================================As announced by the Company on March 31, 2005, information previously reported in quarterly statements for the first three quarters of 2004 has been restated due to a number of changes, notably the retrospective adoption of the U.S. dollar as functional currency at KOA (previously using the Kazakh Tenge) from January 1, 2004, a revision of the marked-to-market valuation of derivative instruments, and a recalculation of minority interest. The restated Q1 2004 statements and the accompanying Management Discussion and Analysis document are being filed today, and will be available on the Company's website, www.nelsonresources.com, and on SEDAR, www.sedar.com. They can also be obtained on application from the Company. REVIEW OF OPERATIONS====================At March 31, 2005, the Company has interests in five onshore producing fields inwestern Kazakhstan.During Q1 2005, Nelson continued the successful growth achieved in 2004, with the Company's share of production from its fields increasing despite the adverseconditions due to the unexpectedly long and harsh winter. During the quarter, production of crude oil net to Nelson (with the KKM share taken as 76%) averaged27,439 barrels of oil per day (bopd), an increase of 28% over the average rate for the previous quarter of 21,362 bopd, and a 141% increase over the average rate for Q1 2004 of 11,374 bopd.This increase was due primarily to the acquisitions of a further 40% stake in KKM and a 50% interest in the Arman field, but also reflects increases in total field production from the Alibekmola, North Buzachi and Karakuduk fields. Nelson is continuing to make good progress with its field development programs at Alibekmola, North Buzachi and Karakuduk fields, with additional wells drilled, rigs mobilized, processing facilities expanded and further wells added to the water injection fund. At Kozhasai, the pilot production program has seen the first new well completed, with initial test results expected during the second quarter of 2005. The following table details production amounts, production rates and sales volumes over the quarter, as given for financial reporting purposes - KOA and North Buzachi at 50%, Chaparral/KKM at 100%, and Arman at 50% since February 1, 2005.================================================================================ Production Production rate Sales (bbls) (bopd) (bbls) Q1 2005 Q1 2004 Q1 2005 Q1 2004 Q1 2005 Q1 2004--------------------------------------------------------------------------------KOA 1,181,991 725,683 13,133 7,975 1,176,118 656,383North Buzachi 508,519 309,388 5,650 3,400 510,703 319,709Chaparral/KKM* 779,290 - 8,659 - 642,943 -Arman** 93,386 - 2,075 - 88,518 - --------- --------- ------- ------- --------- ---------Total 2,563,186 1,035,071 29,517 11,374 2,418,282 976,092================================================================================* Nelson had no interest in Chaparral in Q1 of 2004** Production and sales from Arman are included as of the registration date of February 14, 2005Kazakhoil Aktobe (KOA)----------------------During the quarter, KOA continued with a four-rig drilling program at the Alibekmola field, with four new wells drilled. At Kozhasai, a one-rig pilot drilling program is underway and the first new well has been completed, with test results expected during the second quarter of 2005. Although no increases in production occurred during the quarter due to the severity of the winter weather, since the end of the first quarter, production from Alibekmola has reached 30,000 bopd, up from 27,000 bopd at the end of 2004.Other activities during the quarter include:- Processing facilities - existing facilities at Alibekmola are being debottlenecked to reach a capacity of 42,000 bopd by the end of May.- Water injection - pilot water injection at Alibekmola was expanded, with four wells injecting at the end of March and work continuing to bring a further six wells onto injection by August. - Field facilities - new field camp completed during the quarter; oil gathering system expanded and the gas processing facility design was submitted to KOA for approval.North Buzachi-------------During the quarter, seven new wells were drilled at the field with an average well depth of 1,600 ft - each taking approximately 12 days to drill. Two additional rigs are mobilizing to start drilling in the second quarter. Field production increased throughout the quarter to 12,000 bopd in March.Other activities during the quarter include:- Processing facilities - facilities at the nearby Arman field, currently used to process North Buzachi oil, have been expanded to handle 13,500 bopd. Work to upgrade North Buzachi's own processing facilities to handle 20,000 bopd is continuing and scheduled for completion in June.- Water injection - two further wells were added to the injection fund, bringing the total to five. Injection rates reached 10,000 barrels of water per day by the end of March.Karakudukmunai (KKM)--------------------Three new wells were completed during the quarter, increasing the field well count to 69 (excluding abandoned wells). A total of 50 wells were active at the end of the quarter, and production has increased steadily due to new wells online, recompletion of existing wells to more production zones, and increased application of artificial lift. Since the end of the quarter, production has exceeded 10,000 bopd.Other activities during the quarter include:- Water injection - an additional well was transferred to injection during the quarter, and the injection program is continuing to have positive results on oil production rates.- Field facilities - the first phase of the gas utilisation project has been completed, allowing gas to be used for heating purposes thus reducing operating costs. Work on the second phase, allowing the sale of excess gas, will commence in the second quarter.Arman-----The acquisition of the 50% stake in the Arman field was successfully finalized on February 14, 2005. The field continues to be operated by Shell, Nelson's joint venture partner. During the quarter, work continued to maintain productionlevels through well services and workovers, with the field producing 4,200 bopd at the end of the quarter. ****For further information, please contact:----------------------------------------Nick Greene, Chief Financial Officer Tel: 020 7495 8908Nelson Resources Limited ngreene@nelsonresources.co.ukFred Hodder, Senior Vice President Tel: 020 7495 8908Nelson Resources Limited fhodder@nelsonresources.co.ukInvestor Relations:Ann-marie Wilkinson / Nick Lambert Tel: 020 7861 3232Bell Pottinger Corporate & Financial (London)Notes-----Nelson Resources Limited is an oil exploration and production company with operations in the Republic of Kazakhstan. The Company established its presence in the Kazakhstan oil sector in 2000 and its management team, comprising both international and Kazakh executives, has extensive experience of the Kazakh operating and regulatory environment. The Company owns 50% of Kazakhoil Aktobe LLP (KOA), a 50/50 joint venture between Nelson and Kazmunaigas, the national oil company of Kazakhstan, which is developing the Alibekmola and Kozhasai fields. The Company owns a 50% participatory interest in the North Buzachi oil field located in western Kazakhstan (50% Nelson, 50% CNPC International (Buzachi) Inc.). In May 2004, Nelson purchased 60% of Chaparral Resources Inc., which has a 60% interest in the joint stock company Karakudukmunai, operator of and owner of a 60% interest in the Karakuduk field. In January of 2005, Nelson acquired the 40% interest in this field previously owned by Kazmunaigas, bringing the Company's aggregate ownership interest in the field to 76%. In February 2005, the Company also acquired a 50% interest in the Arman field, withthe other 50% held by Shell. The Company also holds an option to acquire a minimum 25% participatory interest in two Caspian Sea offshore blocks, Zhambai South and South Zaburunye. The Company maintains its operational office in Almaty, Kazakhstan, which oversees the field joint ventures in western Kazakhstan. Nelson and its affiliated companies employ approximately 1,100 people. Common shares of Nelson are listed on the Toronto Stock Exchange and London's Alternative Investment Market under the symbol NLG.Further information on Nelson Resources can be found on the Company's website atwww.nelsonresources.com.Readers are cautioned that the preceding statements and information may include certain estimates, assumptions and other forward-looking information. The actual future performance, developments and/or results of the Company may differ materially from any or all of the forward-looking statements, which include current expectations, estimates and projections, in all or part attributable to general economic conditions and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including oil prices, imprecision of reserve estimates, drilling risks, future production of gas and oil, rates of inflation, changes in future costs and expenses related to the activities involving the exploration, development, production and transportation of oil, hedging, financing availability and other risks related to financial activities, and environmental and geopolitical risks. Discussion of the various factors that may affect future results is contained in the Company's recent filings with Canadian securities regulatory authorities. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. ****The following financial statements can also be found on the Company's website, www.nelsonresources.com.================================================================================NELSON RESOURCES LIMITEDUnaudited Consolidated Statements of Operations--------------------------------------------------------------------------------Expressed in thousands of U.S. dollars, Three months endedexcept per share amounts March 31 2005 2004*--------------------------------------------------------------------------------Revenue Crude oil $ 98,468 $ 26,398Expenses Cost of production 10,788 3,516 Sales and transportation 14,630 5,217 Depreciation and amortization 12,921 4,142 General and administration 6,491 3,206 Derivative instruments 5,320 4,019 Other compensation costs (9,105) 9,729 -------- -------- 41,045 29,829--------------------------------------------------------------------------------Profit/(loss) from operations 57,423 (3,431)--------------------------------------------------------------------------------Other income/(expenses) Foreign exchange loss (751) (937) Interest and financing costs (5,484) (4,496) Interest and other income 1,230 783 Minority interest (1,533) - -------- -------- (6,538) (4,650)--------------------------------------------------------------------------------Profit/(loss) before income taxes 50,885 (8,081)--------------------------------------------------------------------------------Income taxes (15,040) (1,764)--------------------------------------------------------------------------------Net profit/(loss) $ 35,845 $ (9,845)--------------------------------------------------------------------------------Basic profit/(loss) per share 0.0415 (0.0133)Diluted profit/(loss) per share 0.0406 (0.0133)Weighted average common shares outstanding 863,090,139 742,758,882Diluted weighted average common shares outstanding 882,009,251 742,758,882================================================================================* as restated ****================================================================================NELSON RESOURCES LIMITEDConsolidated Balance Sheets--------------------------------------------------------------------------------Expressed in thousands of U.S. dollars, March 31 December 31 March 31except share amounts 2005 2004 2004* unaudited audited unaudited--------------------------------------------------------------------------------AssetsCurrent assetsCash and cash equivalents $ 62,593 $ 56,486 $ 45,539Accounts receivable and prepaid expenses 64,413 57,693 24,685Inventory 16,718 15,175 7,737 -------- -------- --------Total current assets 143,724 129,354 77,961Oil and gas properties, full cost 313,719 297,879 141,750Property, plant and equipment 20,630 20,119 16,765Advances to oil and gas limited partnership 27,052 26,646 24,635Derivative instruments 197 - -Deferred tax 17,750 9,359 -Other non-current assets 6,142 3,871 328--------------------------------------------------------------------------------Total assets $ 529,214 $ 487,228 $ 261,439--------------------------------------------------------------------------------LiabilitiesCurrent liabilities Accounts payable $ 40,477 $ 31,471 $ 18,847Accrued liabilities and deferred income 18,742 21,638 8,497Income taxes payable 11,557 5,398 631Derivative instruments 55,134 29,638 7,838Note payable to related party 23,912 23,912 -Bank loan - - 90,000Current portion of long-term debt 40,674 41,523 8,967 -------- -------- --------Total current liabilities 190,496 153,580 134,780Long-term liabilities - debt 116,425 121,776 73,350Deferred tax 3,201 3,258 -Other provisions and creditors 2,945 1,972 276Minority interest 23,409 21,877 ---------------------------------------------------------------------------------Total liabilities 336,476 302,463 208,406--------------------------------------------------------------------------------Shareholders' equityShare capital 8,634 8,620 7,452Additional paid in capital 295,317 294,462 183,777Other compensation costs 21,650 31,221 13,744 -------- -------- -------- 325,601 334,303 204,973Accumulated deficit (101,115) (136,960) (150,500)Other comprehensive loss (31,748) (12,578) (1,440)--------------------------------------------------------------------------------Total shareholders' equity 192,738 184,765 53,033--------------------------------------------------------------------------------Total liabilities and shareholders' equity $ 529,214 $ 487,228 $ 261,439--------------------------------------------------------------------------------Outstanding share capital--------------------------------------------------------------------------------Common shares, U.S.$0.01, 1,500,000,000 authorized 863,398,095 862,036,095 745,113,967Preferred shares, U.S.$0.01, 50,000,000 authorized - - -================================================================================* as restated ****================================================================================NELSON RESOURCES LIMITEDUnaudited Consolidated Statements of Cash Flows--------------------------------------------------------------------------------Expressed in thousands of U.S. dollars Three months ended March 31 2005 2004*--------------------------------------------------------------------------------Cash Flows from continuing operations Net profit/(loss) from continuing operations $ 35,845 $ (9,845)Adjustments to reconcile net profit/(loss) to net cash provided by operating activities: Deferred tax (214) - Interest income (406) - Other compensation costs (9,105) 9,729 Exchange rate loss 42 1,297 Depreciation and amortization 12,921 4,142 Discount accretion 369 327 Derivative instruments (1,881) 3,943 Retirement obligation accretion 47 6 Amortization of note discount 151 - Loan arrangement fee amortized 733 648 Minority interest 1,533 - -------- -------- 40,035 10,247Decrease/(increase) in working capital (4,966) (9,236)--------------------------------------------------------------------------------Net cash provided by operating activities 35,069 1,011--------------------------------------------------------------------------------Cash flows from investing activitiesCapital expenditure on oil and gas properties (23,407) (4,544)Acquisition of Arman 3,451 -Acquisition of participatory interest in North Buzachi - (32,250)Purchase of property, plant and equipment (15) (5,055)Advances to oil and gas limited partnership - (1,317)--------------------------------------------------------------------------------Net cash used in investing activities (19,971) (43,166)-------------------------------------------------------------------------------- Cash flows from financing activitiesProceeds from exercise of stock options 403 2,448Bank loans received 26,366 42,000Bank loans repaid (33,086) -Other non-current assets (2,674) ---------------------------------------------------------------------------------Net cash provided by/(used in) financial activities (8,991) 44,448-------------------------------------------------------------------------------- Net increase in cash and cash equivalents 6,107 2,293Cash and cash equivalents at beginning of period 56,486 43,246--------------------------------------------------------------------------------Cash and cash equivalents at end of period $ 62,593 $ 45,539================================================================================* as restated ****NELSON RESOURCES LIMITEDNotes to First Quarter 2005Interim Unaudited Consolidated Financial StatementsNote 1 Basis of Presentation and Significant Accounting PoliciesThe accompanying consolidated financial statements as of March 31, 2005 and for the three month periods ended March 31, 2005 and 2004 are unaudited but include all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the consolidated financial information set forth therein and in accordance with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The auditor did not conduct a review of the original consolidated financial statements as of March 31, 2004 and for the three month period ended March 31, 2004. The auditor's review of the restatement of such March 31, 2004 financial statements was solely to review the impact of the restatements identified during the 2004 year-end audit. All amounts are stated in U.S. dollars unless otherwise indicated.The accounting policies followed are consistent with those outlined in the annual audited financial statements. These unaudited consolidated financial statements do not include all disclosures normally provided in annual financial statements and should be read in conjunction with the Company's audited annual consolidated financial statements for the year ended December 31, 2004.The consolidated financial statements of the Company include the accounts of theCompany and its wholly owned subsidiaries, Commonwealth & British Services Limited ("CBS"), NRL Acquisition Corp. ("NRLAC"), Nelson Petroleum Buzachi Holdings B.V. ("NPBH BV"), Nelson Petroleum Buzachi B.V. ("NPB BV"), Nelson Buzachi Holdings Limited ("NBHL"), Nelson Buzachi Limited ("NBL"), Nelson Petroleum (KKM) Holdings Ltd, Nelson Petroleum (KKM) Ltd, NR Exploration Holdings Ltd and NR Exploration Ltd. NPB BV holds a 50% participatory interest in the license to the North Buzachi field, which is reflected on a proportionategross basis.The Company's interest in Kazakhoil Aktobe LLP ("KOA"), an oil and gas limited partnership in which the Company has a 50% equity interest, is reported using the proportional consolidation method under EITF 00-1 "Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures" as these operations are in the extractive industry where there is a longstanding practice of this treatment.Chaparral Resources, Inc. ("Chaparral") in which the Company bought a 60% controlling interest on May 17, 2004 is fully consolidated. The consolidated financial statements of Chaparral include the accounts of Chaparral and its greater than 50% owned subsidiaries, Closed Type JSC Karakudukmunai ("KKM"), Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau Terra International ("MTI"), Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation ("CAC") and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the common stock of CAP-G directly and 20% indirectly through CAP-D. Chaparral owns, through its subsidiaries, a 60% interest in KKM. KKM was formed to engage in the exploration, development, and production of oiland gas properties in the Republic of Kazakhstan. KKM's only significant investment is in the Karakuduk field, an onshore oil field in the Mangistau region of the Republic of Kazakhstan. On December 27, 2004, Nelson acquired a 40% interest in KKM, a 60% owned subsidiary of Chaparral from Kazmunaigas, the Kazakhstan state oil company. KKM holds a 100% interest in the Karakuduk field. The acquisition increased Nelson's effective interest in the Karakuduk field from its 36% effective interest held through Chaparral, to an aggregate 76% effective interest in the Karakuduk field.KKM's rights to the Karakuduk field may be terminated under certain conditions specified in the field agreement. The term of the agreement is 25 years commencing from the date of KKM's registration. The agreement can be extended to a date agreed between the Ministry of Energy and Mineral Resources and KKM aslong as production of petroleum and/or gas is continued in the Karakuduk field. Acquisition of ArmanOn December 23, 2004, the Company entered into a definitive sale and purchase agreement to acquire a 50% participating interest in Arman Joint Enterprise LLP ("Arman") from the Kazakh state oil company Kazmunaigas. Arman holds the license in the Arman field. Nelson paid a purchase price of $10.8 million from existing cash resources. The government and regulatory approval was obtained on February 14, 2005 from which date the acquisition becomes effective. The Company's interest in Arman is reported using the proportional consolidation method under EITF 00-1. The fair value of assets and liabilities of Arman included in the accounts for the quarter ended March 31, 2005 will be subjected to further investigation and review during 2005, as permitted by FAS No. 141 "Business Combinations". While the effective date of acquisition of the interest in Arman is February 14, 2005, for the purposes of the consolidated statements, the income statement figures have been consolidated from February 1, 2005 given that currently it is not practicable to perform a consolidation at the effective date of acquisition. Consequent to the completion of further investigation and review during 2005, the fair values of assets and liabilities will be adjusted to reflect the consolidation from the effective date of February 14, 2005.All material intercompany balances and transactions are eliminated. Note 2 Economic and Operating EnvironmentsThe Company's continued business activities are located in Kazakhstan. As an emerging market, Kazakhstan does not possess a well-developed business and regulatory infrastructure that would generally exist in a more mature market economy. Furthermore, the Government of Kazakhstan has not yet fully implementedthe reforms necessary to create judicial, taxation and regulatory systems that function with the effectiveness often achieved in more developed markets. As a result, operations in transitional countries involve risks that are not typically associated with those in developed markets.Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could significantly affect the Company's ability to operate commercially. It is difficult for management to estimate what changes may occur or the resulting effect of any such changes on the Company's financial position or future results of operations. The accompanying consolidated financial statements do not include any adjustments that may result from the future clarification of these uncertainties. Such adjustments, if any, will be reported in the Company's consolidated financial statements in the period when they become known and estimable.Note 3 Short-term and Long-term debtAt March 31, 2005 and December 31, 2004 short-term debt comprised:-------------------------------------------------------------------------------- March 31 December 31 2005 2004 ($'000) ($'000)--------------------------------------------------------------------------------BNP Paribas loan - KOA 25,000 25,000ECGD Facility - KOA 745 745Kazkommertsbank loan - Chaparral 14,929 15,778 ------- ------- 40,674 41,523--------------------------------------------------------------------------------At March 31, 2005 and December 31, 2004 long-term debt comprised:-------------------------------------------------------------------------------- March 31 December 31 2005 2004 ($'000) ($'000)--------------------------------------------------------------------------------Due to the Republic of Kazakhstan - KOA 12,545 12,175Vitol loan - Buzachi - 23,837Kazkommertsbank loan - Chaparral 10,000 12,000BNP Paribas loan - KOA 10,418 16,667BNP Paribas loan - Buzachi 26,365 -ECGD Facility - KOA 4,097 4,097HSBK - Buzachi 53,000 53,000 ------- ------- 116,425 121,776--------------------------------------------------------------------------------Note 4 Shareholders' EquityAs of March 31, 2005 the Company had 863,398,095 shares outstanding. As of such date, the Company had the following contingently issuable shares.-------------------------------------------------------------------------------- Number Weighted average exercise price (Cdn$)--------------------------------------------------------------------------------Stock options oustanding 49,170,874 1.47--------------------------------------------------------------------------------Note 5 Commitments and Contingenciesa) Under the license for the Alibekmola and Kozhasai fields, KOA is required to invest a minimum of $47.5 million and $24.5 million over the term of the license, respectively. The license expires on October 19, 2023. As at March 31, 2005 the minimum investment requirement for Alibekmola has been met. All minimum investment requirements under the license for the North Buzachi field have been met.b) A claim has been received from the Company's former Chief Operating Officer, Mr. Roy Meade. Mr. Meade is demanding that the Company make a payment of $2.8 million to him pursuant to a Stock Option Agreement concluded between the Company and Mr. Meade on or about December 1, 1999. The company's position is that no monies are due and owing to Mr. Meade. Mr. Meade has not commenced proceedings in pursuit of his claim. If any proceedings are commenced by Mr. Meade, they will be vigorously defended by the Company.c) Extensive national, regional and local environmental laws and regulations affect all of the oil operations conducted through the Company's joint ventures in Kazakhstan. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for user fees, penalties and other liabilities for the violation of those standards and establish in some circumstances obligations to remediate current and former facilities and off-site locations.The Company believes it is currently in compliance with all existing Kazakhstan environmental laws and regulations. However, in the future, compliance with morestringent laws or regulations, or more vigorous enforcement policies of any regulatory agency, could require material expenditures for the installation and operations of systems and equipment for remedial measures, any or all of which could have a material adverse affect on its business, financial condition and results of operations.Note 6 Reconciliation of results from U.S. GAAP to Canadian GAAPThese consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP), which conform in all material respects with those applicable in Canada (Canadian GAAP), exceptas described below: (a) Stock-Based Compensation and Other Stock-Based PaymentsApplicable for financial periods beginning on or after January 1, 2004, the Canadian Institute of Chartered Accountants ("CICA") has amended CICA Handbook Section 3870 "Stock-Based Compensation and Other Stock-Based Payments". This Section requires stock-based compensation and other payments to be recognised inthe financial statements through expense, and share-based transactions to be measured on a fair value method. Under U.S. GAAP, the Company values stock options using the intrinsic value method (note 2(o)). Under Canadian GAAP, the impact on net profit/(loss) of valuing stock options using the fair value methodwould be as follows:-------------------------------------------------------------------------------- Three months ended March 31($'000) except share amounts 2005 2004--------------------------------------------------------------------------------Net profit/(loss) Per U.S. GAAP 35,845 (9,845) Reverse other compensation costs per the intrinsic method (9,105) 9,729 Other compensation costs per the fair value method (3,414) (70) ------- ------- Per Canadian GAAP 23,326 (186)Basic earnings/(loss) Per U.S. GAAP 0.0415 (0.0133) per share Per Canadian GAAP 0.0270 (0.0003) Diluted earnings/(loss) Per U.S. GAAP 0.0406 (0.0133) per share Per Canadian GAAP 0.0264 (0.0003)--------------------------------------------------------------------------------(b) Financial InstrumentsIn January 2005, CICA introduced three new Handbook Sections relating to financial instruments, Section 1530 "Comprehensive Income, Section 3855 "Financial Instruments - Recognition and Measurement", and Section 3865 "Hedges". As permitted by these standards, the Company adopted these standards as of January 1, 2004. As a result, the accounting for the Company's cash flow hedges in 2004 and 2003 is consistent under U.S. GAAP and Canadian GAAP. ****ENDNELSON RESOURCES LIMITED