PTR.L Regulatory News (PTR)

30 June 2017

PetroNeft Resources plc

("PetroNeft" or the "Group" or the "Company")

2016 Final Results

PetroNeft (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its final results for the year ended 31 December 2016. In addition, PetroNeft announces that the Company's Annual Report and Accounts for 2016 and Notice of the 2017 AGM will be mailed to shareholders later today and will be available online at the Company's website www.petroneft.com.

Highlights

· Significant success in horizontal drilling at South Arbuzovskoye although result of the 10km step-out S-374 well on Sibkrayevskoye was disappointing

· Gross production from Licence 61 increased 35% compared to 2015:

o Gross production 990,931 barrels of oil

o Average gross production of 2,707 bopd (2015: 2,021 bopd)

o Net to PetroNeft 1,353 bopd (2015: 1,010 bopd)

· 65.0 mmbbls total proved and probable (2P) reserves net to PetroNeft

Outlook

· Drilling at Sibkrayevskoye No. 375 due to commence in July 2017 - further delineation of major discovery

· Active work programme planned at Licence 61 in 2017 and 2018

· Business Development activity ongoing to identify new opportunities

Dennis Francis, Chief Executive Officer of PetroNeft Resources plc, commented:

"2016 was a busy and challenging year for PetroNeft, during which the company carried out an extensive drilling programme at Licence 61, raising production and gaining further understanding of our development opportunities.

The year ahead continues to present challenges but also some grounds for optimism. We have great support in our much valued partnership with Oil India. Together we see opportunities to strengthen and grow our Company through development and possibly acquisition. In the near term, we look forward to the S-375 well, which is due to commence in the coming weeks and is being drilled about 2km from existing wells, which could add material proved (P1) reserves and determine our 2018 Sibkrayevskoye development plans."

For further information, contact:

The information contained in this announcement has been reviewed and verified by Mr. Dennis Francis, Director and Chief Executive Officer of PetroNeft, for the purposes of the Note for Mining, Oil and Gas Companies issued by the London Stock Exchange in June 2009. Mr. Francis holds a B.S. Degree in Geophysical Engineering and a M.S. Degree in Geology from the Colorado School of Mines. He has also graduated from the Harvard University Program for Management Development. He is a member of the American Association of Petroleum Geologists and the Society of Exploration Geophysicists. He has over 40 years' experience in oil and gas exploration and development.

PetroNeft Resources plc

Final Results

for the year ended 31 December 2016

Forward Looking Statements

This report contains forward-looking statements. These statements relate to the Group's future prospects, developments and business strategies. Forward-looking statements are identified by their use of terms and phrases such as 'believe', 'could', 'envisage', 'potential', 'estimate', 'expect', 'may', 'will' or the negative of those, variations or comparable expressions, including references to assumptions.

The forward-looking statements in this report are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These forward-looking statements speak only as at the date of these financial statements.

Chairman's Statement

2016 was an active year for our Company, particularly at Licence 61 where, with our partner Oil India, we drilled wells at Arbuzovskoye and Sibkrayevskoye. The work programme saw a mix of results, as described below. 2016 also saw continuing challenges for the industry as a whole with further significant weakness in the oil price internationally.

Operations

The existing production wells at Lineynoye and Arbuzovskoye generally performed reasonably well during 2016 but continued their expected natural decline. The main development programme in 2016 brought the southern part of the Arbuzovskoye oil field into production. Thanks to the considerable experience gained in drilling horizontal wells in 2015 we achieved excellent results at South Arbuzovskoye where the two horizontal and two vertical wells all achieved initial production rate greater than forecast.

In August 2016 we announced the results of a delineation well at Sibkrayevskoye. The S-374 well was a long (10 km) step out from previous wells to a different structural high. Unfortunately it failed to encounter commercial oil and the well was plugged and abandoned.

2017 work programme

Following the S-374 result, and in view of the low oil prices expected in the near term, it was decided to defer the first development pad at the Sibkrayevskoye oil field until we could drill a further appraisal well just 2 km from existing wells. We will drill this delineation well (S-375) at Sibkrayevskoye in 2017 with a view to commencing development of Sibkrayevskoye in 2018. Oil India have indicated their willingness to provide the funding for these two projects by way of a shareholder loan to the joint venture company.

Reserves

The table below contains the details of the Ryder Scott report as at 1 January 2016 as adjusted for 2016 production. The report, which is available on www.petroneft.com, demonstrates the large potential of the Sibkrayevskoye oil field which we expect to start developing in 2018.

· Licence 61 as at 31 December 2016 (Ryder Scott report as at 1 January 2016, adjusted for 2016 production).

· Reserves reflect just PetroNeft's 50% share of reserves for each licence.

· All oil in discovered fields is in the Upper Jurassic section.

· Reserves were determined in accordance with the Society of Petroleum Engineers ("SPE") Petroleum Resources Management System ("PRMS") rules.

Engagement with Natlata

Following extensive engagement with our largest shareholder, Natlata Partners Limited ("Natlata"), during 2015 and in connection with their requisitioned EGM, in April 2016 we announced that we reached an agreement on a new Board composition and structure. This involved the appointment Maxim Korobov as non-executive Director and Anthony Sacca and David Sturt as independent non-executive Directors. David Sanders, Gerry Fagan and Paul Dowling left the Board. Mr. Dowling remains CFO of the Company. The agreement includes a commitment from Natlata that it will support the newly constituted Board for a period of two years and I am pleased to report that the new Board has worked well together in the period since April 2016.

I would like to thank David Sanders, who was a founder of the Company, and Gerry Fagan for their many years of service to the Company.

Review of PetroNeft loss for the year

The loss after taxation for the year was US$5,427,660 (2015: US$8,474,383). The loss included a foreign exchange gain on intra-group loans of US$77,458 (2015: loss of US$284,449) and the share of joint venture's net loss in WorldAce Investments of US$5,721,232 (2015: US$8,765,055).

As discussed in previous Annual Reports, the effect of the Licence 61 Farmout was that PetroNeft became a 50% owner of WorldAce Investments Limited which is the 100% owner of Stimul-T the Russian entity that owns Licence 61 and all of the associated infrastructure. Prior to the farmout the WorldAce Group was consolidated 100% in the financial statements of PetroNeft. Once the farmout was completed the consolidation method changed to the equity method which means that just the 50% share of the profit or loss of the WorldAce Group is included in the Income Statement of PetroNeft and 50% of the share of net assets of WorldAce Group is included in the Balance Sheet of PetroNeft rather than showing the proportional share of revenue, expenditure and individual classes of assets and liabilities.

Revenue

Revenue in 2016 and 2015 includes income as operator of both licences and the revenue of PetroNeft's wholly owned subsidiary, Granite Construction in respect of construction services provided in relation to both joint ventures.

Income of PetroNeft Group as Operator of Licence 61 and Licence 67

In the joint venture agreements related to both Licence 61 and Licence 67, PetroNeft is designated as the operator of each Licence. This means that PetroNeft employees and management are responsible for the day to day running of both Licences. Major strategic and financial decisions relating to the Licences require unanimous approval by both shareholders in the respective joint venture agreements.

As PetroNeft management and employees are responsible for day to day matters in both Licences, PetroNeft is entitled to recover a portion of its expenses from the joint ventures. The costs associated with this revenue are included in cost of sales.

In 2016 PetroNeft Group charged a total of US$1.46 million (2015: US$1.64 million) to the joint ventures in respect of management services. PetroNeft also owns a small construction company, Granite Construction, which carries out small ad hoc construction projects such as well pads and on-site accommodation on both Licences. In 2016 Granite Construction charged the WorldAce Group US$0.81 million (2015: US$0.75 million) in respect of these services.

Finance Revenue

Most of the finance revenue relates to interest receivable on loans to joint ventures. During 2016 PetroNeft had interest receivable of US$3,011,025 (2015: US$2,826,303) on its loans to WorldAce Group and US$234,402 (2015: US$205,189) on its loans to Russian BD Holdings B.V.

Key Financial Metrics - WorldAce Group

Because of the equity method of consolidation that applies to PetroNeft's interest in WorldAce, it is difficult to extract meaningful metrics from the PetroNeft consolidated income statement. Therefore, the metrics below are an extraction from the audited financial statements of the WorldAce Group and give an indication as to the performance of Licence 61:

Net Loss - WorldAce Group

The net loss of WorldAce Group for the full year decreased to US$11,442,464 from US$17,530,110 in 2015. The decrease in the loss for the year before taxation can be attributed to the fact that there was no impairment necessary in the year. Of the US$6.6 million in interest payable by WorldAce, US$3.0 million is payable to PetroNeft. Due to the lower oil price environment and a reduction in reserves at the Lineynoye oil field an impairment of oil and gas properties in the amount of US$9.1 million was required in 2015.

Revenue, Cost of Sales and Gross Margin - WorldAce Group

Revenue from oil sales was US$23,208,363 for the year (2015: US$20,600,188). Cost of sales includes depreciation of US$3,337,902 (2015: US$2,856,469), which was higher mainly due to increased production. The gross margin improved during the year also due to higher production. Operating costs per barrel (cost of sales excluding depreciation and Mineral Extraction Tax) were lower at US$8.04 (2015: US$10.73 per barrel). We would expect the gross margin to improve in future periods as our facilities and field operations are fully staffed and can handle additional production from the Sibkrayevskoye oil field once it comes online. We produced 990,931 barrels of oil (2015: 737,655 barrels) in the year and sold 985,824 barrels of oil (2015: 761,123 barrels) achieving an average oil price of US$24 per barrel (2015: US$27 per barrel). All oil was sold on the domestic market in Russia.

Finance Costs - WorldAce Group

Finance costs of US$6,744,948 (2015: US$5,144,634) mainly relates to interest on loans from PetroNeft and Oil India.

Taxation - WorldAce Group

There is no tax payable in 2016 or 2015.

Current and Future Funding of PetroNeft Group

In the 2015 Annual Report we outlined that PetroNeft expected to start receiving interest due on its shareholder loans to WorldAce in the second half of 2017 once the development of the Sibkrayeskoye oil field in Licence 61 was up and running. The S-374 appraisal well drilled in 2016 at the Sibkrayevskoye oil field, to assess the true extent of the field 10km to the south of existing wells, did not encounter commercial hydrocarbons. The result of this well has led to the postponement of the commencement of the development of the Sibkrayevskoye oil field by one year pending the result of a new appraisal well, S-375, which will be drilled in the summer of 2017. As a consequence of this, the date by which PetroNeft expects to start receiving interest due on its shareholder loans to WorldAce has been extended by a minimum of 12 months from the previously guided estimate of late 2017.

Success of the S-375 well would provide assurance that there are at least two pads to be developed at Sibkrayevskoye, in which case it is expected that the development of the Sibkrayevskoye oil field will commence in 2018. The proposed first pad at Sibkrayevskoye has already been delineated by the S-370, S-372 and S-373 wells. The S-375 well is being drilled within the proposed pad 2 area which is about 2km from the existing wells that found oil and is within the same structural closure. The S-374 well was more than 10km south in a different structural lobe. The S-373 well at the proposed pad 1 area has produced oil during the last two winters at consistent rates giving further comfort to the Company of the prospects of the area.

In 2016 the Board of Oil India provided a non-binding indication of their willingness to provide a US$25 million shareholder loan to WorldAce for the development of Sibkrayevskoye. Should the S-375 well not be successful the joint venture shareholders will need to consider other options. This could include the development of Sibkrayevskoye as a one-pad development focussed only on the area surrounding previous wells such as S-373 or it could lead to some further appraisal work. The joint venture shareholders have provided non-binding indications of their willingness to consider providing continuing support in this event, including not immediately seeking repayments of principal or payment of interest under shareholder loan agreements.

The effect of the delay in receiving interest due is that PetroNeft will require additional funding to cover its operating costs during the next 12 months. Management have prepared cash flow projections for the period to 31 December 2018 which indicate a shortfall of funds by the end of quarter one 2018, and a cumulative shortfall of approximately US$1 million by 31 December 2018, irrespective of the success of S-375.

The Company is currently in confidential discussions pursuing several options in order to meet this potential shortfall. These include the potential sale or farmout of Licence 67, short term debt financing from a related corporate entity and the acquisition of producing and non-producing assets in share for share type transactions. The Board believe that the first two options can be completed in a short timeframe. In relation to the latter option, the Company has signed non-disclosure agreements and opened data rooms. As there are delaying factors, including regulatory requirements, around a share for share type transaction, the timeframe to close such a transaction could be several months following binding agreement between the parties.

The Directors are satisfied that the options being pursued are progressing well and are confident the funding gap can be solved.

The successful development of S-375 and the potential shortfall in funds represent material uncertainties that may cast significant doubt upon the Group's and the Company's ability to continue as a going concern as described in Note 2 to the Final Results.

Summary

2016 was a mixed year for PetroNeft with positives and negatives coming from a busy work programme. The lessons learned from the 2015 programme of horizontal wells bore good results at Arbuzovskoye leading to a 35% increase in production. The result of the S-374 well at Sibkrayevskoye has led us to delay the commencement of the Sibkrayevskoye development pending the result of the S-375 well. Our industry is continuing to go through tough times at present but we have future development targets such as Sibkrayevskoye that will still be profitable at current reduced oil prices.

Annual Report and AGM

The annual report will be mailed to shareholders and published on the Company's website (www.petroneft.com) on 30 June 2017. The AGM will be held in Dublin on 15 September 2017.

Finally, I know that I speak for all the Directors, management and staff of the Group in giving sincere thanks to our shareholders, both old and new, for your continued support throughout the past year.

David Golder

Non-Executive Chairman

Consolidated Income Statement

For the year ended 31 December 2016

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016

Consolidated Balance Sheet

As at 31 December 2016

Consolidated Statement of Changes in Equity

For the year ended 31 December 2016

Consolidated Cash Flow Statement

For the year ended 31 December 2016

Notes to the Preliminary Financial Statements

For the year ended 31 December 2016

1. Basis of Accounting and Presentation of Financial Information

While the financial information included in this announcement has been prepared in accordance with the Group's accounting policies under International Financial Reporting Standards ("IFRS") as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The Company is distributing the full financial statements that comply with IFRS on 30 June 2017.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2016 or 2015, but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts. Both reports were unmodified but the 2016 report did draw attention to going concern issues by way of emphasis of matter.

Adoption of IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations

A number of amendments to existing IFRS (principally related to clarifications and refinements of definitions) became effective for, and have been applied in preparing, these Financial Statements. The application of these amendments did not result in material changes to the results or financial position of the Group or the Company.

2. Going Concern

PetroNeft is facing a potential funding shortfall in 2018 due to the delay in the commencement of the Sibkrayevskoye oil field development. The effect of this delay is to also delay the commencement of payments to PetroNeft of interest due to it under shareholder loan agreements with WorldAce. The effect of this is that PetroNeft will require additional funding to meet its operating costs during the next 12 months.

The S-374 appraisal well drilled at Sibkrayevskoye oil field in Licence 61 in 2016 did not encounter commercial hydrocarbons. The result of this well has led to the postponement of the commencement of the development of the Sibkrayevskoye oil field by one year pending the result of a new appraisal well, S-375, which will be drilled in the Summer of 2017. As a consequence of this, the date by which Petroneft expects to start receiving interest due on its shareholder loans to WorldAce has been extended by a minimum of 12 months from the previously guided estimate of late 2017.

Success of the S-375 well would provide assurance that there are at least two pads to be developed at Sibkrayevskoye, in which case it is expected that the development of the Sibkrayevskoye oil field will commence in 2018. The proposed first pad at Sibkrayevskoye has already been delineated by the S-370, S-372 and S-373 wells. The S-375 well is being drilled within the proposed pad 2 area which is about 2km from the existing wells that found oil and is within the same structural closure. The S-374 well was more than 10km south in a different structural lobe. The S-373 well at the proposed pad 1 area has produced oil during the last two winters at consistent rates giving further comfort to the Company of the prospects of the area.

In 2016 the Board of Oil India provided a non-binding indication of their willingness to provide a US$25 million shareholder loan to WorldAce for the development of Sibkrayevskoye. Should the S-375 well not be successful the joint venture shareholders will need to consider other options. This could include the development of Sibkrayevskoye as a one-pad development focussed only on the area surrounding previous wells such as S-373 or it could lead to some further appraisal work. The joint venture shareholders have provided non-binding indications of their willingness to consider providing continuing support in this event, including not immediately seeking repayments of principal or payment of interest under shareholder loan agreements.

2. Going Concern (continued)

The Group has analysed its cash flow requirements through to 31 December 2018 in detail. The cash flow includes estimates for a number of key variables including timing of cash flows of expenditure and management of working capital, and the Directors believe that the Group's cash flow forecasts represent the best estimate of the actual cash flows over the forecast period at the date of approval of the financial statements. The cash flow is stress tested to assess the adverse effect arising from reasonable changes in circumstance. The cash flow projections for the period to 31 December 2018 indicate a potential shortfall of funds by the end of quarter one in 2018.

The Company is currently in confidential discussions pursuing several options in order to meet this potential shortfall. These include the potential sale or farmout of Licence 67, short term debt financing from a related corporate entity and the acquisition of producing and non-producing assets in share for share type transactions. The Board believe that the first two options can be completed in a short timeframe. In relation to the latter option, the Company has signed non-disclosure agreements and opened data rooms. As there are delaying factors, including regulatory requirements, around transferring licenсes and in a share for share type transaction, the timeframe to close such a successful transaction could be at least six months following binding agreement between the parties. The Board is confident that one of these options will bring a solution.

The successful development of S-375 and the potential shortfall in funds represent material uncertainties that may cast significant doubt upon the Group and the Company's ability to continue as a going concern. Nevertheless, after making enquiries, and considering the uncertainties described above, the Directors are confident that the Group and the Company will have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts.

Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group or Company was unable to continue as a going concern.

3. Segment information

At present the Group has one reportable operating segment, which is oil exploration and production through its joint venture undertakings. As a result, there are no further disclosures required in respect of the Group's reporting segment.

The risk and returns of the Group's operations are primarily determined by the nature of the activities that the Group engages in, rather than the geographical location of these operations. This is reflected by the Group's organisational structure and the Group's internal financial reporting systems.

Management monitors and evaluates the operating results for the purpose of making decisions consistently with how it determines operating profit or loss in the consolidated financial statements.

Geographical segments

Although the joint venture undertakings WorldAce Investments Limited and Russian BD Holdings B.V. are domiciled in Cyprus and the Netherlands, the underlying businesses and assets are in Russia. Substantially all of the Group's sales and capital expenditures are in Russia.

4. Loss per Ordinary Share

Basic loss per Ordinary Share amounts are calculated by dividing net loss for the year attributable to ordinary equity holders of the Parent by the weighted average number of Ordinary Shares outstanding during the year. Basic and diluted earnings per Ordinary Share are the same as the potential Ordinary Shares are anti-dilutive.

The Company has instruments in issue that could potentially dilute basic earnings per Ordinary Share in the future, but are not included in the calculation for the reasons outlined below:

· Employee Share Options -These potential Ordinary Shares are anti-dilutive for the years ended 31 December 2016 and 2015.

· Warrants - All remaining warrants expired during 2015.

6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited

PetroNeft Resources plc has a 50% interest in WorldAce Investments Limited, a jointly controlled entity which holds 100% of LLC Stimul-T, an entity involved in oil and gas exploration and the registered holder of Licence 61. The interest in this joint venture is accounted for using the equity accounting method. WorldAce Investments Limited is incorporated in Cyprus and carries out its activities, through LLC Stimul-T, in Russia.

The balance sheet position of WorldAce Investments Limited shows net liabilities of US$25,915,002 following a loss in the year of US$11,442,464 together with a positive currency translation adjustment of US$14,298,281. PetroNeft's 50% share is included above and results in a negative carrying value of US$8,246,586. Therefore, the share of net assets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$8,246,586 is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from WorldAce Investments (see Note 8). 

6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)

Additional financial information in respect of PetroNeft's 50% interest in the equity-accounted joint venture entity is disclosed below:

The currency translation adjustment results from the movement of the Russian Rouble during the year. All Russian Rouble carrying values in Stimul-T, the 100% subsidiary of WorldAce are converted to US Dollars at each period end. The resulting gain or loss is recognised through other comprehensive income and transferred to the currency translation reserve. The Russian Rouble appreciated significantly against the US Dollar during the year from RUB73.3:US$1 at 31 December 2015 to RUB60.9:US$1 at 31 December 2016.

6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)

6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)

The above capital commitments in the joint venture are incurred jointly with Oil India International B.V. The Group has a 50% share of these commitments.

7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V.

PetroNeft Resources plc has a 50% interest in Russian BD Holdings B.V., a jointly controlled entity which holds 100% of LLC Lineynoye, an entity involved in oil and gas exploration and the registered holder of Licence 67. The interest in this joint venture is accounted for using the equity accounting method. Russian BD Holdings B.V. is incorporated in the Netherlands and carries out its activities in Russia.

The balance sheet position of Russian BD Holdings B.V. shows net liabilities of US$1,065,376 following a loss in the year of US$576,396 together with a positive currency translation of US$1,184,600. PetroNeft's 50% share is included above and results in a negative carrying value of US$532,688. Therefore, the share of net assets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$532,688 is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from Russian BD Holdings B.V. (Note 8).

7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (continued)

Additional financial information in respect of PetroNeft's 50% interest in the equity-accounted joint venture entity is disclosed below:

7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (continued)

There were no capital commitments as at 31 December 2016 or 31 December 2015.

The Company has granted a loan facility to its joint venture undertaking WorldAce Investments Limited of up to US$45 million. This loan facility is US$ denominated and unsecured. Interest currently accrues on the loan at USD LIBOR plus 6.0% but the Company has agreed not to seek payment of interest until 2018 at the earliest. The loan is set to mature on 31 December 2022. As at 31 December 2016 the loan was fully drawn down. The loan from the Company to Russian BD Holdings is repayable on demand. Interest currently accrues on the loan at USD LIBOR plus 5.0% per annum.