Urals Energy Plc Regulatory News (UEN)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). With the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

Urals Energy PCL ("Urals Energy" or the "Company")

Final results for the year ended 31 December 2017

Urals Energy PCL (AIM: UEN), the independent exploration and production company with operations in Russia, is pleased to announce its audited financial results for the year ended 31 December 2017.

Key statistics for the year ended 31st December 2017 compared with the year ended 31 December 2016:

Operational highlights

Financial highlights

*Earnings before interest, taxation, depreciation and amortisation (hereafter - "Normalised EBITDA" or "EBITDA") is a non-IFRS unaudited measure which the Group uses to assess its performance. It is defined as earnings before interest and taxation.

Post-period end and outlook

Andrew Shrager, Chairman of Urals Energy, commented:

In 2017, we maintained our production at a similar level to that of 2016 at 756,717 bbls, and benefitted from increased net backs due to higher prices. While costs and taxes have increased, we achieved EBITDA of US$7.7 million compared with US$7.8 million in 2016. During the year, we increased our capital spending to just under US$8 million, starting our development programmes for Komi and South Dagi. In the case of Komi, we had a serious set back with our drilling contractor, as announced in May 2017, and with South Dagi, we encountered delays in the mobilisation and start up of our new rig. The drilling programme at South Dagi is now proceeding satisfactorily as announced on 19 June 2018, and we expect to complete the first well before the end of July 2018.

Net profit before tax and FOREX effects remains disappointing at approximately US$834,000, compared with a profit of US$1.3 million in 2016. Profit after tax at US$14.0 million, but this is due to the recognition of accumulated tax losses of Urals Energy LLC (the former management company of the Group), following its merger with Petrosakh. It remains the case that for companies operating in Russia, the oil tax regime remains a concern as it is based on production levels as opposed to profitability. The Russian Government has announced that it intends to undertake a trial for some large companies of a new regime based on profitability, but there is no certainty as to whether it will be widened to all companies or when.

Nevertheless, given our continued strong EBITDA, the Board intends to recommend to shareholders for their approval the payment of a dividend for the year to 31 December 2017 at the equivalent of the same rate per share as paid last year, being US 6.2 cents per share, representing a dividend yield of approximately 5% at the closing mid market price of the Company's shares quoted on AIM yesterday and at current exchange rates, provided that there is no substantial change in conditions in the intervening period. If approved at the Company's AGM in November, it is likely the dividend will be paid shortly after the AGM.

In pursuit of our strategic development, 2017 was a transition year for the Company, following our acquisitions and the new licences achieved in 2015 and 2016, as we prepare to open discussions with potential partners for our major development opportunities on Kolguyev Island and Komi. The completion of the Blackwatch Petroleum Services Competent Person's Report was an important step in our preparations and this has confirmed our total Remaining Proven and Probable Reserves at 107.0 million bbls as at 31 December 2017. This exercise has been thorough, and assisted us in upgrading our data rooms. Brandon Hill were appointed in May 2018 to assist us in identifying partners for these developments. With this substantial reserve base, we have the potential to increase our production substantially in partnership with oil service companies. We will update the market as discussions develop.

For further information, please contact:

The Company's accounts for the year ended 31 December 2017 will shortly be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20 and will be sent to shareholders shortly.

Chief Executive Officer's Statement

Year ended 31 December 2017

Operating environment

The twelve months ended 31 December 2017 were characterised by continuing high volatility in the crude oil market. During the period, oil prices averaged US$54 per barrel (2016: US$44), with the Russian Rouble strengthening on average by 13% compared with the same period in 2016. Domestic prices for oil products ranged over the period from US$43 to US$115 per barrel (2016: US$32 to US$92).

Operating results

Summary table: Gross revenues before excise and export duties (US$'000)

In 2017, total gross revenues increased by US$18.9 million. This increase was due to a US$7.2 million increase in gross revenues in the local market and a US$11.7 million increase in revenues from export shipments. The 29% increase in gross revenues in the local market was a result of a 1% decrease in sales volumes and a 13% average increase in refined products selling prices in Russian Rouble equivalent. The Russian Rouble strengthening versus the US Dollar had also a positive impact on the increase in gross revenue. A 119% increase in gross revenue from export shipments was the result of a 15% increase in crude oil sales price (2017: US$50 per barrel, vs 2016: US$44 per barrel) and a 91% increase in the volume shipped in 2017 due to the acquisition of Arctic Oil Company.

An increase in market prices for oil and oil products and the strengthening of the Russian Rouble led to an increase in average net back prices for both export and domestic sales of crude oil and petroleum (refined) products.

A 17% increase in net back prices for crude oil domestic sales was broadly in line with the 13% average strengthening of the Russian Rouble versus the US Dollar and a 2% increase in the domestic market price of crude oil.

A 19% increase in net back prices for refined products in 2017 is a combination of a variety of trends, being: a 13% average increase in sales prices for refined products, the Russian Rouble strengthening which was partially offset by a 7% increase of Excise Tax for gasoline and diesel fractions combined with increases in refinery and transportation costs. The net back for domestic product sales is defined as gross product sales minus VAT, transportation costs, Excise Tax and refining costs.

Summary table: Net backs (US$/barrel)

Gross profit (net revenues less cost of sales) in 2017 increased by 16% to US$8.5 million, from a gross profit of US$7.3 million in 2016. The growth in sales volumes by 2% and the increase in average sales prices in the local market by 13% were offset by the increases in Excise tax, Export duty and cost of sales.

Cost of sales in 2017 totaled US$35.7 million, as compared with US$21.8 million in 2016, of which US$4.3 million and US$5.3 million respectively represented non-cash items, principally depreciation, amortisation and depletion. Two factors influenced the operating costs of the Company in 2017: the strengthening of the Russian Rouble versus the US Dollar; and Rouble denominated costs. Without taking into consideration changes in finished goods (the difference between the cost of finished goods at the end and beginning of the period) the Company increased its operating costs in Russian Rouble equivalent by 40% compared with that in 2016. The increase of operating cost in Russian Rouble equivalent is a combination of:

· a 36% increase in Unified Production Tax cost (51% of the total increase in operating cost). This increase was caused by changes in tax legislation (an increase in the base for tax rate calculation) and increase in Brent (Urals) prices which also made a negative contribution to tax; and

· an 18% increase in employee costs at production entities (16% of the total increase in operating cost) mainly caused by the Arctic Oil Company acquisition and indexation; and

· a 44% increase in the cost of materials (33% of total increase in operating cost). This increase was mainly caused by gas condensate purchases by Petrosakh for further refining and the acquisition of additional additive for this purpose.

The other part of the increase was due the additional operating cost related to production of the acquired Arctic Oil Company and the intensive workover program on Kolguev Island.

Selling, general and administrative expenses increased during 2017 to US$6.0 million from US$4.4 million in 2016. The Company had an average increase of 21% in Russian Rouble denominated selling, general and administrative costs in the reporting period, as compared with the previous period. The main driver of this rise was increased storage and transportation expenses related to small-scale wholesale activities at Petrosakh (including the cost of fuel used for transportation), increases in loading services related to having two export shipments per year from Kolguev Island and increases, in employee costs (including a one-off severance payment to Alexey Ogarev, the former Vice-President and Board member of the Company).

Net finance expense during 2017 was US$0.6 million (2016: US$3.9 million net finance income). Net finance expenses for the period primarily consisted of exchange rate movements from the strengthening of Russian Rouble vs US Dollar at the end of 2017, offset by the interest accrued on the borrowings.

Operating profit, net of finance expenses and the recognition of deferred tax benefit of US$12.2 million in 2017 resulted in a net profit for the year of US$14.0 million (2016: US$8.3 million).

The increase in sales volumes and prices in 2017 and the strengthening of the Russian Rouble vs the US Dollar offset by increases in both Excise Tax expenses and cost of sales and selling expenses, resulted in a consolidated normalised EBITDA of US$7.7 million, compared with US7.8 million in 2016, with EBITDA margins of 17.3% and 26.8% respectively.

Management EBITDA (US$'000) - Unaudited

* Depreciation, depletion and amortisation ("DDA") expense as presented here is different from the amount presented in the consolidated financial statements, due to the share in DDA included in the cost of finished goods unsold as of the balance sheet date.

Net debt position

As at 31 December 2017, the Company had net debt of US$7.1 million (calculated as long-term and short-term debt, less cash in bank and less loans issued). As at 31 December 2016, the Company had net debt of US$5.1 million.

As at 31 December 2017, the total borrowing of the Company was US$9.9 million (2016: US$6.8 million), including: US$4.3 million of credit facilities from the Sakhalin branch of PJSC Sberbank of Russia, US$2.6 million of debt which was acquired with two private Russian companies, RK-Oil and BVN Oil and US$3.0 million of short term borrowings from Kamchatcomagroprombank.

Operational update

Petrosakh

In April 2017, the Company spudded Well 102, which is located on the main Petrosakh licence area. In August 2017, the testing of the well was completed. The location of the well is at an area of the reservoir where porosity is relatively low compared with other areas of the reservoir. The Company anticipates that the well will flow for three years and will then be used as a water injector to maintain pressure in the reservoir.

During 2017 the Company actively worked on the preparation of a field development plan, an exploration drilling project and a trial production project involving new exploration wells for the South Dagi area. The Company's initial South Dagi development programme currently consists of the drilling of four new wells (Well 1, Well 2, Well 3 and Well 5).

In June 2017, the Company signed a rig delivery contract with Jereh Group, a Chinese company, for drilling the first well at South Dagi. In August 2017, the rig arrived on the Island of Sakhalin and was delivered to the oil field. After preparatory work the Company spudded its first well, a planned exploration well (Well 1), at the South Dagi field on Sakhalin Island. After delays due to the weather conditions and rig's mobilisation and operational set up, the Company commenced drilling and as of 23 June 2018 drilling had reached 500 metres (the target depth of Well 1 is 2,200 metres).

In parallel, in June 2018 the Company completed and tested a workover of an existing well located on the South Dagi licence area (Well 7). During well tests, the daily oil volumes achieved from Well 7 were approximately 225 bbls/day.

Downstream

Petrosakh continues to refine 100% of its crude oil production and sells all of its refined products into the local market.

The highly competitive nature of the refined products market has caused the Company to constantly reassess its marketing activity. At the beginning of 2017, the Company entered into a new 24 month non-revolving CAPEX credit facility to secure storage facilities for refined products in Yuzhno-Sakhalinsk on Sakhalin Island. This allowed the Company to sell approximately 50% of its refined products in Yuzhno-Sakhalinsk during the period and increase its customer base.

In 2017 the Company successfully made a shipment of fuel oil by sea. The Directors believe that this will allow the Company to become involved in bunkering activity which is highly profitable in this region and will decrease its inventory stock of fuel oil.

To allow for the most efficient usage of its spare plant capacity, the Company commenced purchases of condensate form external suppliers. This allows for increases in both production volumes and profitability at the local level.

The Company continues to upgrade its plant equipment to remain in line with statutory requirements for fuel quality and to decrease the cost of refining.

Arcticneft

During the period, the Company continued to focus on minimising the natural decline in field production through workovers as a matter of priority. During the period, the Company continued perforation work on five wells at Arcticneft and Arctic Oil Company. This led to a stablised production level during the period.

After a preliminary analysis of the well stock, the Company decided to implement artificial oil lifting using jack pumps at several wells. A number of jack pumps were partially installed in 2017, with this process due to be completed during 2018.

In June 2017 the Company engaged Prokon, a geotechnical analysis company, to update the model for the development of the Peschanoozerskoye Field. This work is now at a final stage and the Board expects to receive detailed recommendations based on several scenarios, which will be used to guide our future steps.

RK-Oil

In April 2017, the Company spudded its first exploratory well on the licence held by RK-Oil. Unfortunately the contractor, Vis-Mos LLC, made slow drilling progress due to a poorly managed team. As a consequence, the Company decided to terminate the drilling contract with this contractor and seek compensation for the Company's costs. The contract was on a turnkey basis, but some mobilisation costs were incurred by the Company. There are currently a limited number of vacant drilling rigs and qualified drilling crews in the Komi republic and the Company is still in the process of seeking an independent supervisor and new contractor to continue the drilling.

Taxation

In June 2018, taking into account the significant tax burden on the oil and gas sector, the Russian government adopted further changes in tax policy for the coming six years. These changes provide for a gradual increase in mineral extraction tax until the year 2021, in combination with a simultaneous decrease in export duty until 2024 from the current 30% to 0%. These changes should provide for decreased excise tax on refined products. The Company is currently in the process of evaluating the impact of anticipated changes on its financial and trading prospects.

Strategy

Our strategy is to exploit our expanded portfolio of proven and probable reserves through planned field developments over the next couple of years. We intend to explore partnerships with oil service companies as well as possible co-operation with companies with complimentary operations, for example in the Komi region.

Our plans for 2018 are as follows:

Kolguev Island:

· continue work overs and the installation of jack pumps with the aim of keeping production stable at approximately 1,000 bbls/day;

· consider and assess a new programme of deviated wells and/or fracking to increase production significantly from existing horizons; and

· apply for additional licences on the Island, in order to take advantage of our unique position as the only operator with oil processing, tank farm availability and its own tanker terminals.

Sakhalin Island:

· continue well work overs at Petrosakh, thus seeking to maintain production at approximately 1,200 bbls/day;

· upgrade refinery equipment to increase the yield and quality of products;

· obtain a marine terminal licence for the sale of bunker fuel to local ship operators;

· deploy our newly acquired rig to drill three further new wells at our new South Dagi licence; and

· workover two existing wells on South Dagi.

Komi Republic:

· additional seismic interpretation for the two oil fields held by RK Oil and BVN Oil; and

· following the cancelation of the first drilling contract at RK Oil, seek a partnership, ideally with a major oil service company to manage the development of the large proven and probable reserves, potentially coordinated with adjacent oil fields that have necessary infrastructure and transit connections.

Leonid Dyachenko

Chief Executive Officer

Please click on, or paste the following link into your web browser, to view the associated consolidated financial statements for Urals Energy Public Company Limited as of and for the year ended 31 December 2017 as a PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/1122T_1-2018-6-29.pdf