PTR.L Regulatory News (PTR)

PetroNeft Resources plc

("PetroNeft" or the "Company")

2012 Interim Results

PetroNeft Resources plc (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its results for the 6 months ended 30 June 2012.

Highlights: 

·; H1 production of 394,652 barrels of oil for the period - average of 2,168 bopd

·; Arbuzovskoye oil field brought into production from the discovery well

·; Successful completion of the first of ten planned Arbuzovskoye production wells

·; Lineynoye pad 2 studies to inform future field development strategies

·; New debt facility for US$15 million agreed with Arawak Energy

·; Current group production 2,300 bopd

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

"The first part of 2012 was challenging but we now better understand the Lineynoye Pad 2 performance and believe the studies will enable us to avoid such outcomes in the future. The recent results from the Arbuzovskoye oil field have however been very encouraging and demonstrate that PetroNeft is now on the right track to progressively grow its production and cash flows. We look forward to completing the additional Arbuzovskoye wells over the coming months and the resulting increase in our production profile and cash flows."

For further information, contact:

PetroNeft Resources Plc

Unaudited interim condensed

 consolidated financial statements

For the 6 months ended 30 June 2012

Directors David Golder (U.S. citizen)

(Non-Executive Chairman)

Dennis Francis (U.S. citizen)

(Chief Executive Officer)

Paul Dowling

(Chief Financial Officer)

David Sanders (U.S. citizen)

(Executive Director and General Legal Counsel)

Gerry Fagan

(Non-Executive Director)

Thomas Hickey

(Non-Executive Director)

Vakha Sobraliev (Russian citizen)

(Non-Executive Director)

Registered Office and Business Address 20 Holles Street

Dublin 2

Ireland

Secretary David Sanders

Auditors Ernst & Young

Chartered Accountants

Harcourt Centre

Harcourt Street

Dublin 2

Ireland

Nominated and ESM Adviser Davy

49 Dawson Street

Dublin 2

Ireland

Joint Brokers Davy Canaccord Genuity

49 Dawson Street 88 Wood street

Dublin 2 London

Ireland EC2V 7QR

United Kingdom

Principal Bankers Macquarie Bank Limited AIB Bank

Ropemaker Place 1 Lower Baggot Street

28 Ropemaker Street Dublin 2

London Ireland

EC2Y 9HD

United Kingdom

KBC Bank Ireland

Sandwith Street

Dublin 2

Ireland

Solicitors Eversheds

One Earlsfort Centre

Earlsfort Terrace

Dublin 2

Ireland

White & Case

5 Old Broad Street 4 Romanov Pereulok

London 125009

EC2N 1DW Moscow

United Kingdom Russia

Registered Number 408101

Registrar Computershare

Heron House

Corrig Road

Sandyford Industrial Estate

Dublin 18

Ireland

Dear Shareholder,

The first half of 2012 was a challenging period for PetroNeft. Despite showing early positive results the production achieved from the Pad 2 wells at Lineynoye was far below expectations. More recently, however, the Arbuzovskoye oil field is showing itself to be a very promising oil field with initial rates of over 300 bopd from each of the first two wells drilled on that oil field. Achieving production and cash flow growth from the Arbuzovskoye oil field is the focus of the Company in the near term. On the financing front we agreed a new US$15 million debt facility with Arawak Energy.

Production

Production in the six months to 30 June 2012 was 394,652 barrels of oil or an average of 2,168 bopd. While the production from Pad 2 at Lineynoye was disappointing the production from Pad 1 is encouraging and we have seen the benefit of pressure support from the water injection programme we commenced in mid-2011.

We also brought the Arbuzovskoye No.1 discovery well into production in the first half of 2012 and achieved rates of 350 bopd from it. More recently we have announced the results of the first of up to ten planned production wells at Arbuzovskoye, at an initial rate of 310 bopd. Group production is currently 2,300 bopd.

Development drilling programme - Arbuzovskoye oil field

In the winter months of early 2012, we constructed a 10 km pipeline and utility line to link the Arbuzovskoye oil field to the central processing facility at Lineynoye. We also purchased the necessary materials including casing, diesel and other supplies necessary to drill ten production wells at Arbuzovskoye and transported these to the field using winter roads. In May 2012 we commenced production from the Arbuzovskoye No. 1 well through the pipeline at a rate of 350 bopd. It is currently producing 300 bopd. The necessary infrastructure is now complete, and materials for drilling purchased, so only the construction cost of about US$700,000 remains to be spent on each well.

In August 2012 we commenced drilling of new production wells at the Arbuzovskoye oil field and the first development well, No. 101, has delivered encouraging results. The core and log data indicate that the reservoir is substantially identical to the good quality reservoir in the Arbuzovskaya No. 1 discovery well. The reservoir is made up of coarse grained sandstone at the top and grades to fine grained sandstone to siltstone at the base - these types of sandstones are excellent reservoirs as demonstrated by the flow rates achieved at Arbuzovskaya No. 1. The second new well, No. 102, is drilling ahead at present and we expect to bring it into production by the end of October 2012.

Thereafter, wells are likely to be brought into production in batches of two or three rather than one by one as we need to revert to drilling at a five metre spacing at the surface between well heads due to space constraints at location. Once the last well of a batch is drilled we will bring all wells in the batch into production in quick succession. Our target initial rate for wells on this field is 150 bopd so we are encouraged to have exceeded this in our first two wells. Nevertheless, the 101 well is only the first of 10 planned wells and there may be some variation in flow rates as we look forward to the additional Arbuzovskoye wells coming into production and increasing cash flows.

Lineynoye oil field - Pad 2 studies

Since the results of Pad 2 became apparent in February 2012 we have been working hard to understand the reasons for this result and how to avoid such a result in future. Whilst all the studies are not yet complete we do now have a good understanding of the reasons for the poor results.

In first preparing the plan to develop the Lineynoye oil field we had used, amongst other information, the analysis of the core recovered from the Lineynoye No. 6 delineation well to assess the relative permeability of the reservoir and define parameters for how we expected oil and water to flow at different levels of oil saturation. This indicated that oil should dominate the liquid flow when oil saturations were in the 50% to 60% range.

The wells drilled at Pad 2 were generally lower structurally and closer to the oil-water-contact than the wells at Pad 1. Also at Pad 2 it appears that the reservoir properties were tighter and had lower oil saturations. The combination of relative permeability and fractional flow effects in the reservoir therefore led to much higher water cuts at Pad 2. Unfortunately these issues are not always obvious from the log analysis of individual wells.

Lineynoye oil field - Pad 2 studies; improvements made to future operations

In future we can seek to avoid the issues encountered at Pad 2 by drilling higher on the structures and avoiding potential oil and water transition zones. We will also take more cores in production wells and carry out more extensive transient pressure testing. At Arbuzovskoye we plan to core about three of the first ten wells drilled and will carry out transient pressure testing on each well at an early stage in its life. To date, wells on Arbuzovskoye have performed ahead of expectations.

Exploration

Licence 61

The successful exploration programme in 2011 led to discovery of two new oil fields at Licence 61 including the 50 mmbbl Sibkrayevskoye oil field. In the first half of 2012 we selected a location for a delineation well at Sibkrayevskoye, prepared the site and moved the drilling rig and the necessary supplies to the site. We now hope to drill this delineation well in 2013. We will also need to acquire additional seismic data at Sibkrayevskoye and this is currently planned for the winter of 2013/14.

Licence 67

In February 2012 we completed drilling of the Ledovaya No. 2a well and encountered oil at both the Lower Cretaceous and Upper Jurassic horizons. A modest flow test was achieved from the Upper Jurassic horizon but it was not possible to test the Lower Cretaceous interval for technical reasons. Further testing and analysis is required.

In February we also completed tests of the Cheremshanskoye No. 3 well where we identified three separate oil pools and achieved flow tests from all three. Cheremshanskoye is a large structure and will require further delineation and seismic to fully ascertain the size of the discovery.

We continue to study the results from Ledovoye and Cheremshanskoye and in the coming months we will agree the next steps for Licence 67 with our partner Arawak Energy.

Successful debt financing

In May 2012 PetroNeft agreed a new three year debt facility with Arawak Energy. The loan is secured on PetroNeft's 50% interest in Licence 67 and will be repayable in one lump sum at the end of the three-year loan period in May 2015. The interest payable under the loan will be LIBOR plus 6%, a competitive rate given present market conditions. Under the terms of the loan PetroNeft also granted Arawak 4,000,000 warrants over shares at a strike price of US$0.1345 per share.

Financial results for the period

The net loss after tax for the period was US$6,990,186 (6 months ended 30 June 2011 profit: US$3,067,178). The loss includes a foreign exchange loss of US$2,760,623 (6 months ended 30 June 2011 profit: US$5,969,474) on loans denominated in US Dollars and Russian Roubles from PetroNeft to its Russian subsidiaries Stimul-T and Granite Construction whose functional currency is the Russian Rouble. Net cash flows from operating activities in the period were US$4,685,880 (6 months ended 30 June 2011: US$ 3,432,954).

Conclusion

The first half of 2012 was a busy period for the Company. While the Lineynoye production rate build up has been slower than desired we have learned key lessons from the work carried out to date and the outlook for growing our production this year and in future years is good.

The first delineation well at Arbuzovskoye (Well No. 101) displays excellent reservoir characteristics and has proved to be almost identical to the Arbuzovskoye No. 1 discovery well. These wells are now producing at around 300 bopd each, which is an excellent initial rate. We look forward to building on production and cash flow as we drill additional development wells at Arbuzovskoye.

David Golder

Non-Executive Chairman

28 September 2012

1. Corporate information

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2012 were authorised for issue in accordance with a resolution of the Directors on 27 September 2012.

PetroNeft Resources plc ('the Company', or together with its subsidiaries, 'the Group') is a Company incorporated in Ireland. The Company is listed on the Alternative Investment Market ('AIM') of the London Stock Exchange and the Enterprise Securities Market ('ESM') of the Irish Stock Exchange. The address of the registered office and the business address in Ireland is 20 Holles Street, Dublin 2. The Company is domiciled in the Republic of Ireland.

The principal activities of the Group are oil and gas exploration, development and production.

2. Going concern

As noted in the 2011 Annual Report the Lineynoye Pad 2 results meant that certain production and cash flow covenants that were part of the Macquarie facility were not met during, at and post the year-end. While Macquarie waived these covenants at the year-end, it meant that it was not possible to increase the amount available under the borrowing base loan facility. Macquarie supported and agreed to the Arawak additional loan facility and did not seek repayment of their base loan facility as Macquarie prefer to see Arbuzovskoye coming into production as it offers the best option for increasing Group production and cash flows.

Although Macquarie remains a supportive lender and key shareholder, they have indicated, absent any alternative funding option, their preference that the debt be reduced by about US$7.5 million by mid 2013. However they did not seek a repayment out of the proceeds of the Arawak loan facility and remain supportive of the Group's plans to bring the Arbuzovskoye oil field into production this year particularly in light of the recent rates achieved from the Arbuzovskoye No. 1 well. The Board has a plan to bring the Arbuzovskoye oil field into production in the coming months thereby increasing the Group's long-term cash flows. The recent success of the Arbuzovskoye 101 well was a first step in this regard.

The Board remain positive about the resilience of the Group despite the pressures outlined above. The Group has analysed its cash flow requirements through to 31 December 2013 in detail. The cash flow includes estimates for a number of key variables including timing of cash flows of development expenditure, oil price, production rates, and with the ongoing support of its lenders and management of working capital the Directors believe that the Group's cash flow forecasts represent the Group's best estimate of the actual results 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. It is recognised that the cash flow impact of these changes could result in additional funding being required. The Group is also in discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which would strengthen the Group's financial position.

These circumstances represent a material uncertainty 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, the Directors continue to adopt the going concern basis in preparing these interim condensed consolidated financial statements.

Accordingly, these interim condensed 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. Accounting policies

3.1 Basis of Preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2012 have been prepared in accordance with IAS 34 Interim Financial Reporting.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2011 which are available on the Group's website - www.petroneft.com.

The interim condensed consolidated financial statements are presented in US dollars ("US$").

3.2 Significant Accounting Policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2011.

4. Segment information

At present the Group has one reportable operating segment, which is oil exploration and production. 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 operating profit or loss in the consolidated financial statements.

Geographical segments

All of the Group's sales are in Russia. Substantially all of the Group's capital expenditures are in Russia.

During 2010 the Group paid a deposit of US$400,000 to Nord Imperial for the usage of their pipeline. This deposit will be returned at the end of the contract which is in 2033. In the interim consolidated financial statements this deposit has been discounted and the unwinding of a discount of US$5,975 has been taken to finance revenue in the current period (6 months 2011: reversal of discount of US$30,552 was taken to finance costs).