PTR.L Regulatory News (PTR)

PetroNeft Resources plc

Preliminary Results for the Year Ended 31 December 2010

2010 - A Transformational Year

PetroNeft Resources plc ("PetroNeft", "the Company" or "the Group"), (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its preliminary results for the year ended 31 December 2010.

Operational Highlights

·; Year-round production commenced on schedule in Q3 2010

·; Group 2P reserves increase 37% to 96.9 mmbbls

·; Production reached 3,100 bopd from 9 wells

·; Drilling of 17 additional production wells planned for 2011 underway

·; Five well exploration programme targeting 120 million barrels of reserves underway

Financial Highlights

·; Commencement of oil sales in late Q3 2010

·; Capital expenditure of US$42 million in 2010; a fully-funded US$53 million spend planned for 2011

·; Successful oversubscribed US$43 million equity placing in October 2010

·; Macquarie US$30 million Loan facility signed in May 2010, improved terms agreed in April 2011

Dennis Francis, CEO of PetroNeft commented:

"2010 was a transformational year which saw PetroNeft evolve from an exploration company to one with both exploration and production. Our proved and probable oil reserves grew by 37% with the addition of two new oil fields to our portfolio.

"2011 is set to be PetroNeft's busiest year to date with production continuing to grow on the back of 17 new production wells and 120 million barrels of reserve growth targeted by a major five well exploration programme both of which are already underway. We look forward to updating shareholders on progress on both fronts throughout the year. "

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Forward Looking Statements

This announcement contains forward-looking statements. These statements relate to the Company'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 announcement 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 this announcement.

Glossary

1P Proved reserves according to SPE standards.

2P Proved and probable reserves according to SPE standards.

3P Proved, probable and possible reserves according to SPE standards.

AGM Annual General Meeting.

bfpd Barrels of fluid per day.

bopd Barrels of oil per day.

IAS International Accounting Standard.

IFRIC IFRS Interpretations Committee.

IFRS International Financial Reporting Standard.

km Kilometres.

m Metres.

mmbbls Million barrels.

mmbo Million barrels of oil.

P1 Proved reserves according to SPE standards.

P2 Probable reserves according to SPE standards.

P3 Possible reserves according to SPE standards.

PetroNeft PetroNeft Resources plc.

Stimul-T Limited Liability Company Stimul-T, a wholly owned subsidiary of PetroNeft, based in the Russian Federation.

PetroNeft Resources plc

Preliminary Results 2010

PetroNeft Resources plc

Chairman's Statement

A transformational year

2010 was an important year. PetroNeft achieved its primary goal of bringing its existing oil fields into production having completed the construction of a 60km pipeline and oil processing facilities at the Lineynoye oil field as well as drilling nine new production wells. 2011 will see further development and production growth with the planned addition of 17 new production wells at the Lineynoye oil field.

2010 also saw further exploration success with the discovery of the Arbuzovskoye oil field at Licence 61 and the addition of reserves at Licence 67 which had been acquired following an auction in December 2009. In 2010 proved and probable reserves grew by 37% from 71 million barrels of oil ("mmbbls") to 97 mmbbls. 2011 will see a five well exploration programme target additional reserves of approximately 120 mmbbls net to PetroNeft.

Production

Following the successful completion of a 25 year Crude Oil Transportation and Custody Transfer agreement with Imperial Energy ("Imperial") in August 2009 PetroNeft completed the construction of a 60km pipeline from the Lineynoye oil field to Imperial's facility at Kiev-Eganskoye in the first half of 2010. Oil storage and processing facilities were also constructed at the Lineynoye oil field in 2010 with an initial capacity of 7,400 barrels of fluid per day ("bfpd") which will be added to in 2011 to bring capacity to 14,800 bfpd. These two major construction projects were completed on schedule and largely within budget.

Nine new production wells were also drilled at the Lineynoye oil field and put into production. A programme of hydraulic fracturing was carried out on the nine new wells and production reached 3,100 bopd once this programme was completed and the wells had cleaned up. The Group plans to drill 17 new development wells in 2011. The Group is targeting production in a range of between 7,000 and 8,000 bopd by the end of Q1 2012 when all of these 17 new wells, together with the existing wells, will have been fracture stimulated and returned to production.

Reserves growth

In March 2010 the Board took the decision to drill an exploration well at the Arbuzovskaya prospect in Licence 61. This well was drilled in October and November 2010 and led to the discovery of the Arbuzovskoye oil field. Ryder Scott has assessed that there are 13 mmbbls of proved and probable reserves at Arbuzovskoye. Ryder Scott undertook its first review of Licence 67 which was acquired in January 2010 following a December 2009 state auction. Proved and probable reserves at the Ledovoye field were assessed at 28 mmbbls (14 mmbbls net to PetroNeft).

Successful debt and equity financing

PetroNeft successfully raised US$43 million in October 2010 through a placing of new shares which enabled the Group to commence the Phase 1 project to develop the Lineynoye and West Lineynoye oil fields and become self-financing.

During 2010 we entered into a US$30 million debt facility with Macquarie Bank Limited. This facility gave the Group the ability to complete the nine well production drilling programme in 2010 and to drill the Arbuzovskoye exploration well that led to the discovery of a new oil field.

It remains the Board's intention to fund the Company with a mixture of debt and equity for business development purposes and to accelerate the appraisal and development programme on Licences 61 and 67.

Net Loss

The net loss for the year increased to US$7,125,394 from US$6,471,552 in 2009. The main reason for the increase in losses relates to an increase of US$2,170,904 in overheads partly due to the addition of new staff at our Tomsk operations during the year and the depreciation charge for non-current assets, constructed during the year.

Revenue, Cost of Sales and Gross Margin

Revenue from oil sales was US$5,155,646 for the year. A gross margin of 17% was achieved. Cost of sales includes depreciation of US$530,235. We would expect this margin to improve in future periods as many of the costs will not rise proportionally as production grows. We produced 189,508 barrels of oil in the period and sold 158,295 barrels of oil achieving an average oil price of US$33 per barrel. All of our oil was sold on the domestic market in Russia.

Finance Costs

Finance costs of US$1,356,918 relate to interest on bank loans, discount on deposit paid for pipeline usage, arrangement fees in relation to the Macquarie loan facilities and the unwinding of discount on decommissioning provision.

Finance Revenue

Finance revenue of US$126,595 (2009: US$173,296) arises from interest earned on bank deposits.

Taxation

The current tax charge arises on interest earned from bank deposits. The deferred tax charge arises on interest earned by PetroNeft on loans to its wholly owned subsidiary Stimul-T.

Capital Investment

Several major capital projects were completed in 2010 and further significant investment is planned in 2011. 2010 projects included:

·; Construction of a 60km pipeline from Lineynoye oil field to Imperial Energy's facility at Kiev-Eganskoye.

·; Construction of oil processing, oil storage and crew facilities at the Lineynoye oil field.

·; Drilled and completed nine new production wells and one water source well at the Lineynoye oil field.

·; Drilled one exploration well that led to the discovery of the Lineynoye oil field

In 2011 the Group intends to invest US$53 million, the largest amount it has ever invested in a single year in the following projects:

·; Drill, complete and carry out fracture stimulation on 17 new production wells at Pads 2 & 3 in the Lineynoye oil field

·; Double the capacity of the oil processing facilities at Lineynoye from 7,400 bfpd to 14,800 bfpd

·; Drill three exploration wells at Licence 61, namely, Kondrashevskoye No. 2, Sibkrayevskaya No. 372 and North Varyakhskaya No. 1.

·; Drill two exploration wells at Licence 67, namely, Cheremshanskaya No. 3 and Ledovoye No. 2a. As Licence 67 is 50% owned by Arawak Energy they will contribute 50% of these costs.

Current and future funding of PetroNeft

In May 2010 PetroNeft entered into a loan facility with Macquarie Bank Limited for up to US$30 million. At peak the maximum drawn on this loan was US$16 million, however this had been reduced to US$14.2 million by year-end 2010. In April 2011 a revised facility was agreed for up to US$75 million with immediate availability of US$30 million subject to the satisfaction of conditions precedent primarily related to the perfection of security over certain physical assets of the Group's Russian subsidiaries.

In October 2010 PetroNeft raised US$43 million through a private placing of new ordinary shares. The placing was significantly over subscribed. The placing was co-ordinated by the Group's joint-brokers, Davy and Canaccord Genuity who were assisted by Renaissance Capital. The shares were placed with both new and existing shareholders and the proceeds used to finance the Group's exploration and development programme.

As a result of the equity funding and the Macquarie loan facility the Group's 2011 capital investment programme is fully funded. It is also expected that operating cash flows and the debt capacity of the Group's producing assets will enable the Group to continue investment in 2012 and beyond in order to bring its other oil fields into production.

Business development

The principal near-term objective of the Group remains the development of the northern oil fields on Licence 61. However, we have not lost sight of our longer term objective of securing assets outside of Licence 61 to provide growth for the future.

The acquisition of Licence 67 (Ledovy) was a first step in this growth. This new acreage materially enhances the Company's footprint in the Tomsk Oblast and is in line with our stated growth strategy. PetroNeft was able to win this auction because of its highly experienced management team and ability to be flexible and responsive to the opportunity. In January 2010, Arawak Energy ("Arawak") exercised their option under the August 2008 Area of Mutual Interest Agreement to acquire 50% of Licence 67 and we look forward to working with Arawak to develop this asset. PetroNeft will be the Operator for Licence 67.

We continue to actively examine a number of acquisition opportunities in the Tomsk region and elsewhere in Russia and hope to update shareholders in more detail in the coming months.

Corporate development

We have added a number of senior management positions to the Group this past year as we moved from an exploration to an exploration and production company. These positions were carefully considered and we selected candidates who met both the immediate and long term needs of the Group. The headcount has increased from 63 to 144 during 2010 principally due to the increased number of professionals and operatives required to run a producing oil field and the associated facilities.

I would like to welcome all new employees to the Group and thank all of our employees, old and new, for their hard work in 2010 to achieve our goal of getting into production.

Summary

2010 was a transformational year for the Group. The commencement of production means that the Group will generate significant cash in the coming years to enable it to expand its reserve base both through exploration and delineation in current Licence areas and through business development opportunities in Tomsk and further afield in Russia.

PetroNeft is fortunate to have a highly experienced and dedicated team and this knowledge and experience have enabled us to meet the array of challenges facing the Group in recent years. I am confident that this team will enable PetroNeft to continue to add shareholder value.

Annual report and AGM

The annual report will be mailed to shareholders and published on the Company's website later this month. The annual general meeting will be held in Dublin on 22 June 2011.

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 confidence and continued support through the past year.

David Golder

Non-Executive Chairman

PetroNeft Resources plc

Notes to the Preliminary Financial Statements

for the year ended 31 December 2010

1. Basis of Accounting and Presentation of Financial Information

While the financial information included in this preliminary 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 expects to distribute the full financial statements that comply with IFRS in May 2011.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2010 or 2009, but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified.

Adoption of new IFRS

The Group has adopted the following new and amended IFRS and IFRIC interpretations in respect of the 2010 financial year-end:

The application of the standards and interpretations noted above did not result in material changes in the Group's Consolidated Financial Statements.

2. 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.

3. 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 - 16,860,000 outstanding options as at 31 December 2010 (2009: 13,537,000) that could potentially dilute basic earnings per share in the future. These potential Ordinary Shares are anti-dilutive for the years ended 31 December 2010 and 2009.

·; Warrants - At 31 December 2010, 6,200,000 Ordinary Shares are subject to warrants being exercised. These potential Ordinary Shares are anti-dilutive for the year ended 31 December 2010. There were no warrants outstanding at 31 December 2009.

4. Assets held for sale

In January 2010 Licence 67 was registered thereby completing the acquisition. Under the August 2008 Area of Mutual Interest agreement, Arawak Energy ('Arawak') exercised their option to participate as a 50% partner in the development of License 67, which will be operated by PetroNeft through a jointly controlled entity. The legal agreements and documentation relating to the jointly controlled entity are expected to be completed in June 2011 when the assets held for sale will transfer to the jointly controlled entity. No impairment is expected on these assets upon transfer.

The major classes of assets and liabilities reclassified as held for sale as at 31 December 2010 are as follows:

The net book value at 31 December 2010 includes US$17,288,826 (2009: US$21,242,291) in respect of assets under construction, which are not yet being depreciated.

Additions are construction works mainly in relation to production wells, Central Procession Facility (CPF) and oilfield infrastructure.

Exploration and evaluation expenditure represents active exploration projects. These amounts will be written off to the Consolidated Income Statement as exploration costs unless commercial reserves are established, or the determination process is not completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of these assets will ultimately be recovered, is inherently uncertain.

In accordance with IFRS 6, once commercial viability is demonstrated the capitalised exploration and evaluation costs are transferred to oil and gas properties or intangibles, as appropriate after being assessed for impairment.

Additions in 2010 relate mainly to drilling of an exploration well in Arbuzovskoye oilfield and the purchase of the license and exploration works in relation to Licence 67. All expenditure in connection with License 67 has been reclassified as assets held for sale at year-end (refer to note 4).

At 31 December 2010 restricted cash amounting to US$2.5 million is being held in a Macquarie Debt Service Reserve Account ("DSRA"). This account is part of the security package held by Macquarie and may be offset against the loan in the event of a default on the loan or by agreement between the parties.

Bank deposits earn interest at floating rates based on daily deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.