Urals Energy Plc Regulatory News (UEN)

6 Sep 2006 07:02

Urals Energy Public Company Limited06 September 2006 Urals Energy Public Company Limited Interim Results for period ended 30 June 2006 Urals Energy Public Company Limited (LSE: UEN), the international oil and gasexploration and production company which was admitted to the AlternativeInvestment Market of the London Stock Exchange in August 2005 today announcesits interim results for the period ended 30 June 2006. Highlights - continued delivery on IPO strategy to build a material productionbase through acquisition, development and exploration. Operational Highlights • Increased average production in the period from 4,250 BOPD to 9,089 BOPD through a combination of acquisition and development drilling • Current production of 10,100 BOPD achieves IPO production target for YE 2007 (10,500 BOPD). • Increased 2P reserves to 225 million barrels (1H05: 90 million barrels) up 150% • 10 production wells brought on stream (two at Okruzhnoye, four at Dinyu and four at Potapovskoye) • 5 year extension granted for ongoing exploration at Sakhalin Island • Permanent license depth extension received by Arcticneft for un-tapped and deeper Permian horizon. • Acquired mobile drilling rig to begin development drilling at Dulisminskoye in 2007 Financial Highlights • Gross revenues $78 million (H105: $27 million) up 189% • Operating profit of $4.8 million (1H05: $3.4 million) up 42% • Post tax profit of $3.8 million (H105: Loss of $0.8 million) • Adjusted EBITDA $16 million (H105: $6 million) up 166% • Successfully completed an oversubscribed $209 million equity offering in turbulent markets • Retained cash at period end of $68.7 million Corporate Developments • Successful acquisition of NK Dulisma for $148 million - adding 109 million barrels of 2P reserves and increasing total company 2P reserves to 225 million barrels • NK Dulisma also adds 1.7 trillion cubic feet of gas plus 87 million barrels of oil and condensate P3 reserves. • NK Dulisma benefits from both early start-up of East Siberia-Pacific Ocean Pipeline and recent tax holiday for production taxes signed by President Putin which will significantly enhance future cash flows from East Siberian assets • The company will complete its eighth principal acquisition since IPO when it closes the Voivosh acquisition from LUKoil in September Outlook • On track to achieve stated production targets of approximately 13,000 by year end 2006 and approximately 19,000 by year end 2007 • Focus on fast track production increases, in particular Dulisminskoye - which is expected to produce 3,000 BOPD by year end 2007 and approximately 12,000 BOPD by year end 2008. • Identification and evaluation of additional acquisition opportunities to further increase existing asset base William. R. Thomas, Chief Executive Officer, commented: "We continue to make progress on all fronts and meet our IPO stated objectivesof building the company through exploration, development and acquisition. Our recent acquisition of Dulisma shows the potential, and our ability, toacquire assets at attractive prices that can have an immediate and ongoingmaterial positive impact on the company both operationally and financially. Welook forward to the remainder of the year as we continue to increase productionand look for complementary acquisitions in this prolific hydrocarbon region." Pelham PRJames Henderson 020 7743 6673Gavin Davis 020 7743 6677 Announcement of results for 6 months ended 30 June 2006-09-04 Chief Executive statement We recently marked the first anniversary of Urals Energy as a public company.Our first 12 months have seen us exceed all our stated objectives and today thecompany is producing 10,100 BOPD from a reserve base of over 225 millionbarrels. Our evolution as a successful international E&P company will continue as we growour production, reserves, cash flow and market capitalization. This is madepossible by our strategy of building the company through acquisition,development and exploration. In line with this strategy, the acquisition of OOO NK Dulisma in Eastern Siberiafor $148 million provides us with an excellent reserve base that isstrategically located near the East Siberia - Pacific Ocean pipeline now beingconstructed by Transneft. Recently signed legislation provides important andvaluable tax relief that will significantly enhance its cash flow. Theacquisition increased proved and probable reserves by 109 million barrels of oiland possible reserves by 1.7 trillion cubic feet of gas and 87 million barrelsof oil and condensate. Since the closing of NK Dulisma in June, we have focused on executing ourproduction and exploitation plan across all our properties in Russia. Althoughthe areas in which we operate can sometimes present real challenges in terms ofweather and logistics, I am pleased to report that we are on track with ourRussia-wide development programs. The majority of our development drilling isscheduled to take place in the second half of the year in Petrosakh (SakhalinIsland), Arcticneft (Kolguyev Island), Dinyu (Komi) and Chepetskoye (Udmurtia)which we expect will result in production increases from our existing level of10,100 BOPD to approximately 13,000 BOPD by year end. We will inform you of ourprogress as these new producing wells come on-line. Our strategy of increasing production through acquisition, development andexploration, combined with the impact of high oil prices has generated recordresults for the company. Gross revenues almost tripled to $78 million versus$27 million in 2005, and net revenues increased to $58 million from $21 million. Oil prices continued to rise this year resulting in excellent netbacks. Ourweighted average sales price of $50.34 per barrel exceeded the results of 1H05by over $12.00 per barrel ($38.13 in 1H05), resulting in an overall netbackprice of $37.43 per barrel ($29.68 in 1H05). Financially, we are beginning to achieve momentum as production increases andcost controls are put in-place. We achieved a first half post tax profit of$3.8 million as compared to a loss of $800,000 for the same period last year.Adjusting for non-cash and non-recurring items, our adjusted EBITDA was $16.0million, an increase of 166% from the same period in 2005. The Company's balance sheet was significantly enhanced by the $209 millionequity offering we completed in May to fund the purchase of NK Dulisma andrelated capital expenditures. Despite turbulent market conditions, the equityoffering was oversubscribed. To have such support endorses not only theacquisition but also the overall strategy of the company. Cash at the end of June was $69 million as compared to our total short-term andlong-term bank debt of approximately $73 million. Total shareholders equity isnow $421 million, an increase of $218 million over June 2005. We expect ourdebt capacity to grow significantly over the next 12 months and anticipate thatfurther capital expenditure growth and some future acquisition costs will befunded by internally generated cash flow and new debt. Operations Update Sakhalin Island Current Production: 3,263 BOPD YE 2007 Target Production: 5,400 BOPD Development The first development well at Petrosakh this year, Well No. 45, spudded onAugust 15th and is now drilling ahead to its target depth of 1,928 meters. Theongoing development of Petrosakh's producing Okruzhnoye field has been delayedsince the fall of 2005 pending the processing and interpretation of an onshore3D seismic program. We expect to drill and complete at least three wells atPetrosakh in the second half of this year. Drilling operations are beingcarried-out by our own BU-1600 Russian mobile drilling rig that we purchased andmobilized earlier this year. By using our own equipment and personnel,completed well costs are expected to be over 50% less than previous developmentwells for the Okruzhnoye field. Also during the first half, we completed twosuccessful sidetracks at Okruzhnoye that converted older, marginal wells to oilproducers. Another significant development with the potential to boost production is themobilization of our newly refurbished fleet of fraccing equipment from Canada.This equipment is due to be on site shortly with the first well to be fracced atOkruzhnoye in October. The Okruzhnoye field has excellent potential forfracture stimulation due to the thickness of the gross oil column and thecharacteristics of its hard, sandstone reservoir. We expect good field-wideproduction increases from this program and look forward to reporting more newslater this fall. Following the fraccing program at Okruzhnoye, we willtransport the equipment to the Komi Republic to begin fraccing operations at ourfields there. Exploration As previously reported, the information gained from drilling our first offshoreexploration well, East Okruzhnoye No. 1. has resulted in an intensivere-processing and re-interpretation of our 3D seismic data base. This work isunderway and is expected to be complete by 1Q07. Most important to ourexploration efforts in Sakhalin Island, we received in January a five yearextension of our exploration license by the Russian Ministry of NaturalResources. This extension provides the time and flexibility to properlyevaluate this exciting license area which has the potential of over 850 millionbarrels of evaluated oil resources. We are evaluating exploration drilling options including the use of a jack-uprig to test up to three significant prospects offshore in a single summer-falldrilling season. A decision on timing and drilling equipment options should beannounced by the end of 2006. East Siberia Current Production: 826 BOPD YE 2007 Target Production: 3,000 BOPD The acquisition of NK Dulisma gives us an excellent entry to this strategicallyimportant region. Eastern Siberia is expected to become the most important oiland gas development area of Russia and provide the production base to fill twonew export pipelines - Transneft's East Siberia-Pacific Ocean (the "ESPO") oilpipeline and Gazprom's Russia-China gas pipeline. The Dulisma acquisition wastruly transformational for Urals Energy's reserves and future production. Withthis $148 million cash deal, we booked 109 million barrels of P2 oil reservesand 370 million barrels equivalent of P3 reserves. Dulisma is expected to addas much as 30,000 barrels per day of net production in 2011. The Dulisminskoye field is a large oil, condensate and gas field withdevelopment scheduled to early next year. We expect to spud our firsthorizontal development well in March 2007 and drill a total of 12 horizontalwells by the end of 2008. Field production is expected to increase fromapproximately 3,000 BOPD at the end of 2007 to approximately 12,000 BOPD by theend of 2008. We have purchased a heavy, mobile drilling rig in China and expectdelivery in November. Construction of pad sites, in-field pipelines and earlystage processing facilities will commence this fall. As winter approaches,activity at Dulisma will begin to increase sharply with the arrival of newequipment and personnel to begin field development. We had originally planned to build our own 350 kilometer temporary oil pipelinefrom the field to the regional transportation center of Ust-Kut. However, there-routing by Transneft of the ESPO north from Lake Baikal and up the Lena rivervalley means the pipeline will pass within 40 kilometers of the Dulisminskoyefield. This important development combined with Transneft's rapid progress inconstruction of the ESPO has led us to defer building a temporary pipeline toUst-Kut and continue to use the existing pipeline owned by an adjacent operator. We will monitor the situation over the next year and depending on our expectedproduction profile, the progress of the ESPO, and the requirements of building apermanent 40 kilometer tie-in to the ESPO, we will make a final decision aboutthe construction of a temporary pipeline from Dulisma to Ust-Kut in mid-2007. Timan Pechora Current Production: 4,933 BOPD YE 2007 Target Production: 9,000 BOPD Komi Republic Development drilling operations have continued at Dinyu with the drilling andcompletion of five new development wells (four producers and one injector). Weexpect to complete a total of eight new producers by the end of 2006. No newdrilling occurred at CNPSEI but several wells were worked-over as we sought tominimize natural production decline. We have merged our operating activities in Komi into one company, OOO Dinyu, andhave created a centralized operations and warehouse facility to serve all fivefields in the area. Staffing levels have been reduced and we are continuing toidentify ways to reduce operating costs. The acquisition of three small producing companies from LUKoil (the "Voivoshacquisition") is expected to be completed in September. We are prepared toassume control of operations and begin a basic initial program of workovers toreplace pumps and re-start production from several older wells. We will providefurther updates on our progress here as the year develops. Nenets Autonomous Okrug Further north on Kolguyev Island, Arcticneft has been preparing for its 2006development drilling campaign and the first well is scheduled to spud inSeptember. We have assembled a Russian 3D drilling rig from an abandoned rigand parts on the island and upgraded as required to provide our own drillingcapability. The cost of constructing our own rig is a small fraction of thecost of mobilization and the dayrate of an outside contractor. We plan ondrilling three new development wells in Arcticneft this year. We also willre-enter Well No. 29 this fall and drill a sidetrack to test the lower Permianhorizon that the Ministry of Natural Resources awarded to Arcticneft earlierthis year. The potential for reserves additions and further increases inproduction from this un-tapped lower horizon is exciting. The spudding of our first exploration well in the Urals Nord group of licensesis scheduled for early 2007. The Nadezhdinsky prospect will be tested with a3,700 meter well that is expected to reach target depth in May-June of 2007.The prospect is an Upper Devonian reef that may contain upwards of 60 millionbarrels of recoverable reserves. Geographically located 60 kilometers from theport of Varandey, this prospect could be developed as an all-export oil fieldassuming sufficient reserves are discovered. Urdmurtia Current Production: 1,095 BOPD YE 2007 Target Production: 1,600 BOPD Development drilling of the Potapovskoye field began in March and we have sincedrilled four wells, all successful producers. Drilling results are confirmingour 3D seismic interpretation and three additional development wells arescheduled for completion by year end. Development drilling will continue atPotapovskoye field throughout 2007. Corporate We have made significant progress this year at the corporate level with thetransformation of our group wide accounting function and the installation of anew, corporate management information system. We are on-track with there-organization of our operating companies to provide a consistent andtransparent organization structure and compensation system. We also havecontinued to strengthen our management team with new manager-level hires inaccounting, IT and production management. Outlook The group has grown aggressively in its first 12 months as a listed company andthe independent sector in Russia continues to present compelling opportunitiesfor further growth. We believe we have the necessary technical and managementexpertise, infrastructure and asset base to develop into an important player inthe Russian and FSU oil and gas sector. Our strategy of growth from the development of our P2 reserve base, risk-managedexploration, and new acquisitions continues to provide us with large scaleopportunities to create shareholder value. We believe the Russian governmentwill continue to provide margin enhancement through tax incentives, and weexpect to continue expanding our access to the vast oil reserves of thisimportant oil-producing country. As always, we are reviewing severalinteresting acquisition opportunities and hope to announce new, accretive dealsover the coming months. With the group on track to deliver daily production of 19,000 barrels of oil inthe next 18 months and with ongoing high oil prices, we are positioned togenerate significant returns for shareholders. William R. Thomas Chief Executive Officer Urals Energy Public Company Limited Management's Discussion and Analysis of Results of Operations for the Six Months Ended June 30, 2006 Operating Environment The first half of 2006 was characterized by continued high world oil prices andGroup emphasis on production development and exploitation. Brent oil pricesbegan 2006 at $61.68 per barrel, reached a peak of $74.45 per barrel in May andended the period at $73.31 per barrel. While Russian export prices rose withworld market prices, continued increases in export taxes eliminated most of theeconomic benefit to producers. This was offset by higher domestic prices andthe continuation of netback parity in the Russian market. The Group's averagedomestic oil prices largely tracked the movement in Brent prices, beginning theperiod at $20.69 (net of VAT) per barrel, peaking at $38.95 per barrel in Mayand averaging approximately $30.84 per barrel for the first half of 2006. Against this backdrop, Russian domestic equipment, services and personnel, whilenot as constrained as in the global energy markets, are exhibiting costincreases. As approximately 85% of the company's expenditures are roubledenominated, costs tend to escalate as the rouble appreciates against thedollar. Rouble appreciation for the period increased by 5.9%, from 27.08 to28.78 (RUR/USD). Production and Revenues Crude oil production during the period increased by 107% from 0.77 millionbarrels in first half 2005 to 1.59 million barrels in first half 2006, withaverage daily production increasing from 4,250 barrels per day in first half2005 to 9,089 barrels per day in first half 2006. The total production increaseof 4,839 bopd was the result of both organic growth from development drilling(1,455 bopd) and additions from acquisitions (3,384 bopd). During the period the Group's gross revenues totalled $78.4 million versus $27.3million in the same period in 2005. Net revenues, defined as gross revenues lessexport duties and excise taxes, increased to $58.4 million from $21.2 million inthe same period of 2005. This revenue increase is the result of both the Groupselling 0.8 million barrels of additional crude oil and products than in 2005plus higher commodity prices. Critical to this result was the lifting of themajority of winter crude production from inventory at Petrosakh and Arcticneft,where the break-up of ice in late June allowed the Company to load and ship215,392 and 172,732 barrels respectively (not including volumes loaded of thirdparties' production). Inventory in storage at 30 June 2006 totalled 203,192barrels of crude oil and 78,423 barrels of products for the Group. The Grouprealized a weighted average price of $50.34 per barrel of oil sold in first half2006. Export sales prices for the Group averaged $65.58 per barrel, anddomestic sales prices averaged $30.52 per barrel (net of VAT). Domestic refinedproduct prices, which comprised $9.7 million of our gross revenues for the firstsix months of 2006, averaged $68.42 per barrel (net of VAT). Netbacks and Profitability The convergence of netbacks realized from exports with those from domestic saleswhich first occurred in 2005 continues as a trend. Netback prices are definedas, in the case of exports, gross oil sales price less export duty, customscharges, marketing costs and transportation, and, in the case of domestic crudesales, gross sales price net of VAT. The weighted average netback for all Groupcrude oil sales during the first half was $37.43 per barrel. Crude oil netbacksaveraged $40.07 per barrel for export sales and $30.52 per barrel for domesticsales. Higher average export netbacks reflect the weighting of the majority ofthese sales at the end of the period from our marine shipments following thewinter ice break-up. Netback prices for domestic product sales are defined asgross product sales price minus VAT, transportation, excise tax and refiningcosts. The average products netback for the period was $45.04 per barrel. Gross profit for the first half of the year, (net revenues minus the cost ofproduction), was $18.3 million as compared to $8.5 million in first half 2005.Cost of sales for the first six months of 2006 totalled $40.1 million butincluded $10.8 million of non-cash items, which primarily relates todepreciation, depletion and amortisation expense. SG&A costs increased to $13.5 million as compared to $5.1 million in first halfof 2005. Growth in the largest element, wages and salaries, reflects asignificantly increased workforce and management team to manage new acquisitionsand expanded operations. $2.3 million of these costs is attributable to thenon-cash expense of restricted stock granted to senior management in February2006. Total audit and professional fees reflected the Company's continuedgrowth through acquisitions and related financing activities. Transport andstorage services increased to $2.3 million as compared $0.4 million in firsthalf 2005, due to increased volumes, newly-acquired properties and an increasein product sales with higher transportation costs. Interest incurred for the period was $4.2 million as compared to $3.2 million in2005, of which $0.8 million and $0.1 million were capitalised in the first halfof 2006 and 2005 respectively. Net profit for the first half of the year was $3.8 million as compared to a lossof $0.8 million in first half 2005. Basic earnings per share were 4 centsversus a loss of 2 cents in first half 2005. EBITDA We present EBITDA because we consider it an important supplemental measure ofour operating performance and believe it is frequently used by securitiesanalysts, investors and other interested parties in the evaluation of companiesin our industry. However, EBITDA is not required by, or presented in accordancewith, IFRS and has certain limitations as an analytical tool, and you should notconsider it in isolation, or as a substitute for analysis of our operatingresults as reported under IFRS. Reconciliation of EBITDA to net income is as follows for the periods indicated(in $'000): Six months ended 30 June: 2006 2005 Consolidated Net Income attributable to shareholders 3,700 -886 AdjustmentsDDA (note 7) 7,784 2,706Interest gain/(loss) 3,485 3,217Loss/gain on fixed assets disposals (note 8) 372 (6)Taxes 1,821 755Forex effect (4,319) 192Minority interest 90 -Share-based payments (note 8) 2,285 -Other non-operating items (23) Sub-total 11,518 6,841 IFRS EBITDA 15,218 5,955 When adjusted for non-recurring items which are not considered part of theCompany's normal ongoing operations, management's normalized EBITDA for thesix-month period was $16.0 million. This compares to a normalized EBITDA forthe same period of 2005 of $6.0 million. Taxes Russia has a relatively high cost tax regime and the Company pays a variety oftaxes that are levied as a result of production, export prices, assets andprofits. The Company paid a total of $39.2 million in cash taxes for theperiod. The largest of these taxes are export duties and the unified productiontax. Export duties are set according to a fixed schedule that increases asexport prices rise with a maximum rate of 65% of gross export prices above $25per barrel. High export prices in first half 2006 resulted in an average exportduty for the Company of 43% gross revenue, as the rate increased from $179.58per ton to $199.88 over the period. Unified production tax is a rate set by thegovernment and continued in a trend of escalation for the period, increasingfrom $81.05 per ton to $86.05 per ton. The combined effect of these two taxeswas a continued increase in the tax burden borne by the Company, with the totalof all taxes accrued for the period equalling 50.4% of gross revenues, ascompared to 46.9% in the same period of 2005. Cash Flow For the period, operating cash flow before working capital changes was $15.2million and combined with changes in working capital resulted in $11.4 millionof cash flow from operations. Capital expenditures for exploration anddevelopment in the first half were $19.0 million of which the majority wasinvested at Dinyu and Petrosakh, $6.9 and $4.6 million respectively. The costof acquisitions during first half 2006 was $150.7 million, including an $8.0million payment not payable until the second half of the year and $15.0 millionof debt assumed at Dulisma. At 31 December 2005, the Group's total debt was $34.1. During first half 2006,a total of $12.0 million debt from Bank Zenit was replaced with a subordinatedbank facility from BNP Paribas. As of 30 June 2006, total outstanding bank debtwas $73.8 million. Through a private-placement of 31,088,976 shares from a primary issuance ofcommon stock, the Company raised $195.0 million in net cash proceeds. Thecombination of debt and equity financing activities for the period resulted in atotal net addition to cash of $192.8 million. Cash Position The combined use of $156.4 million for operations, acquisitions and capitalexpenditures was funded by the addition of $192.8 million in net cash fromborrowings and the sale of equity. This resulted in a positive change to thecash position of $36.4 million for the period. Hedging The Company does not hedge any of its crude oil or product sales, costs orcurrency conversions. Management Information System During 2006 the Company launched a project for the standardization of accountingsoftware and management reporting which will result in enhanced transparency andtimeliness of providing information to the shareholders. A contract for designand implementation of the MIS system was signed with Deloitte, and the projectwill be completed and the new system launched by the first quarter of 2007. International Financial Reporting Standards (IFRS) As previously mentioned, the Company's deferred tax liability of $98.8 millionis due to the timing difference of recognizing certain items for IFRS purposesand for Russian income tax purposes on a current basis. These amounts are notcurrently due for payment by the Company. Under IFRS purchase accounting, a portion of the purchase price attributed tothe fair value of unproved and proved oil and gas properties is depleted as theassociated resources are extracted using a unit of production formula. Theresult of such adjustments was an increase to the Company's Depreciation andDepletion, and will adjust depending on the estimate of future proven andproducing barrels of oil. Under IFRS methodology, the Company applies successful efforts accounting toexploration and development expenses. Certain expenses have been capitalizedpending the determination of the success of the related exploration ordevelopment program. The total amount of such capitalized exploration expensewas $12.0 million at 30 June 2006, of which $4.1 million were incurred duringthe first half of 2006. INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AT (unaudited) Note 30 June 31 December 2006 2005Assets Current assets Cash and cash equivalents 68,747 32,334Accounts receivable and prepayments 32,210 23,788Inventories 17,899 12,641Total current assets 118,856 68,763 Non-current assetsProperty, plant and equipment 513,421 287,485Other non-current assets 2,093 2,098Total non-current assets 515,514 289,583 Total assets 634,370 358,346 Liabilities and equity Current liabilitiesAccounts payable and accrued expenses 15,110 7,932Taxes payable 14,555 11,487Short-term borrowings and current portion of long-term 9 22,656 34,117borrowingsAdvances from customers 670 523Amounts due for acquisition of subsidiaries 8,000 - Total current liabilities 60,991 54,059 Long-term liabilitiesLong-term borrowings 9 51,135 47,005Long-term finance lease obligations 1,395 1,357Dismantlement provision 881 813Deferred tax liability 98,846 51,100Other long term liabilities 663 580 Total long-term liabilities 152,920 100,855 Total liabilities 213,911 154,914 EquityShare capital 6 633 460Share premium 6 400,351 201,355Translation difference 11,695 (2,296)Retained earnings (accumulated deficit) 6,414 2,714Equity attributable to shareholders of Urals Energy 419,093 202,233Public Company Limited Minority interest 1,366 1,199 Total equity 420,459 203,432 Total liabilities and equity 634,370 358,346 Approved on behalf of the Board of Directors on 4 September 2006 ____________________________ ___________________________ W.R. Thomas S. M. Buscher Chief Executive Officer Chief Financial Officer INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited) Note Six months ended 30 June: 2006 2005 RevenuesGross revenues 78,444 27,279Less: excise taxes and export duties (20,006) (6,047)Net revenues 58,438 21,232 Operating CostsCost of sales 7 (40,134) (12,732)Selling, general and administration expenses 8 (13,527) (5,137)Total operating costs (53,661) (17,869) Operating profit (loss) 4,777 3,363 Finance costs 9 (3,485) (3,217)Foreign currency gains/(losses), net 4,319 (192)Result before tax 5,611 (46) Income tax (charge) benefit (1,821) (754) Net result 3,790 (800) - Attributable to minority shareholders 90 86- Attributable to shareholders of the parent 3,700 (886)company Basic weighted average number of shares 91,891,653 45,143,468Diluted weighted average number of shares 93,390,285 45,143,468 Basic earnings per share (USD) 0.04 (0.02)Diluted earnings per share (USD) 0.04 (0.02) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (unaudited) Six months ended 30 June: 2006 2005Cash flow from operating activitiesResult before tax 5,611 (46) Total adjustments 9,608 3,944Operating cash flow before changes in working capital 15,219 3,898 Changes in working capital (3,810) (17,894)Cash flow from/(used in) operations 11,409 (13,996) Interest paid (4,949) (1,377)Income tax paid (1,177) (297)Net cash flow from/(used in) operating activities 5,283 (15,670) Cash flow used for investmentsAcquisition of subsidiaries, net of cash acquired Purchase of property, plant and equipment (142,735) (4,500)Net cash used in investing activities (18,958) (4,348) Proceeds from new share issue (161,693) (8,848) Cash flow from financing activitiesProceeds from loans 12,000 35,001Repayment of loans (17,165) (30,053)Proceeds from issuance of ordinary shares, net of associated costs 197,988 26,215Contributions from shareholders 881Net cash from financing activities 192,823 32,044 Effect of exchange rate changes - (50)Net increase in cash and cash equivalents 36,413 7,476Cash and cash equivalents at beginning of the period 32,334 1,421Cash and cash equivalents at end of the period 68,747 8,897 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited) Note Share Share Unpaid Translation Accumulated Equity Minority Total capital premium capital difference gain attributable interest equity (deficit) to Shareholders of Urals Energy Public Company Limited 209 42,172 (11,324) 1,236 (4,341) 27,952 1,327 29,279 Balance t 31 December2004Issue of shares 6 50 24,950 - - - 25,000 - 25,000Contribution from - - 11,324 - - 11,324 - 11,324shareholdersTranslation difference - - - (2,061) - (2,061) (45) (2,106)for the periodNet result for the - - - - (886) (886) 86 (800)period Balance at 30 June 2005 259 67,122 - (825) (5,227) 61,329 1,368 62,697 Balance at 31 December2005 460 201,355 - (2,296) 2,714 202,233 1,199 203,432Issue of shares 6 173 194,961 - - - 195,134 - 195,134Share-based payments - 2,285 - - - 2,285 - 2,285Issuance of warrants - 1,750 - - - 1,750 - 1,750Translation difference - - - 13,991 - 13,991 77 14,068for the periodNet result for the - - - - 3,700 3,700 90 3,790period Balance at 30 June 2006 633 400,351 - 11,695 6,414 419,093 1,366 420,459 SELECTED NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION(unaudited) Note 1: Activities Urals Energy Public Company Limited ("Urals Energy" or the "Company") wasincorporated as a limited liability company in Cyprus on 10 November 2003. UralsEnergy and its subsidiaries (the ''Group'') are primarily engaged in oil and gasexploration and production in the Russian Federation and processing of crude oilfor distribution on both the Russian and international markets. The Group operates in one business segment which is crude oil exploration andproduction. The Group assesses its results of operations and makes itsstrategic and investment decisions based on the analysis of its profitability asa whole. The Group operates within one geographical segment, which is theRussian Federation. The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34,CY-1066, Nicosia, Cyprus. In July 2005, the Company changed its name to UralsEnergy Public Company Limited. The Group's primary office in Russia is locatedat 6 Oktyabrskaya Ul. Moscow, 127018, Russian Federation. At 30 June 2006, the Group comprises the following significant subsidiaries: Entity Nature Jurisdiction Economic interest at 30 June 2006 ZAO Petrosakh Exploration & production Sakhalin 97.2 percentZAO Arcticneft Exploration & production Nenetsky 100.0 percentOOO CNPSEI Exploration & production Komi 100.0 percentZAO Chepetskoye NGDU Exploration & production Udmurtia 100.0 percentOOO Dinyu Exploration & production Komi 100.0 percentOOO NK Dulisma Exploration & production Irkutsk 100.0 percentOOO Michayuneft Exploration & production Komi 100.0 percentOOO Lenskaya Transportnaya Oil Transportation Irkutsk 100.0 percentKompaniyaOOO Urals Energy Management Moscow 100.0 percentOOO Urals-Nord Exploration Nenetsky 100.0 percentUrals Energy (UK) Limited Corporate Services UK 100.0 percentUENEXCO Limited Trading Cyprus 100.0 percent Note 2: Seasonality The Group's largest producing subsidiaries, ZAO Petrosakh and ZAO Arcticneft,operate on Sakhalin and Kolguev Islands, respectively, and are not connected tothe State owned pipeline monopoly, Transneft. Accordingly, the majority oftheir production is exported by tanker. Due to severe weather conditions,shipping tankers can only load during the period of June through early December.Outside this period, oil is either stored or processed and sold on the localmarket. During the period under review, Petrosakh and Arcticneft had produced74.5 and 23.8 thousand tons of crude oil, respectively, and sold 66.0 and 22.0thousand tons of crude oil and oil products. The crude oil export sales tookplace in June 2006. Additionally, Arcticneft sold 8.6 thousands tons ofpurchased crude oil. Most of the crude oil in stock was sold in June; however13,900 tons of crude oil remained in stock at 30 June 2006 in Petrosakh. Totalproduction for the Group for the period was 1.59 million barrels. Note 3: Basis of Presentation The consolidated interim condensed financial information has been prepared inaccordance with International Accounting Standard No. 34, Interim FinancialReporting ("IAS 34"). This consolidated interim condensed financial informationshould be read in conjunction with the Company consolidated financial statementsas of and for the year ended 31 December 2005 prepared in accordance withInternational Financial Reporting Standards ("IFRS"). The 31 December 2005interim condensed consolidated balance sheet data has been derived from auditedfinancial statements. Use of estimates. The preparation of consolidated interim condensed financialinformation in conformity with IFRS requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements preparation and the reported amounts of assets,liabilities, revenues and expenses, and the disclosure of contingent assets andliabilities during the reporting period. Estimates have principally been made inrespect to fair values of assets and liabilities, impairment provisions anddeferred income taxes. Actual results may differ from such estimates. Exchange rates. The official rate of exchange of the Russian rouble to the USdollar ("USD") at 30 June 2006 and 31 December 2005 was 27.0789 and 28.7825Russian roubles to USD 1.00, respectively. Any translation of Russian roubleamounts to US dollars or any other hard currency should not be construed as arepresentation that such Russian rouble amounts have been, could be, or will inthe future be converted into hard currency at the exchange rate shown or at anyother exchange rate. Through early 2006, the Russian rouble was not a convertible currency in mostcountries outside of the former Soviet Union and, further, the Group wasrequired to convert 10 percent of its hard currency proceeds into Russianroubles. During the first half of 2006, substantially all restrictions for hardcurrency transactions were lifted and the rights of the government of theRussian Federation and those of the Central Bank of the Russian Federation toimpose such restrictions were waived. Reclassifications. Certain reclassifications have been made to the first halfof 2005 amounts to conform them to the first half of 2006 presentation. For theperiod ended 30 June 2005, selling, general and administrative expenses weredecreased and cost of sales was increased by $416 thousand, primarily to recordother taxes of exploration and production entities. For the period ended 30 June2005, selling, general and administrative expenses were decreased and othernon-operating gains were decreased by $23 thousand. Note 4: Accounting Policies Except as discussed below, the principal accounting policies followed by theGroup are consistent with those disclosed in the financial statements for theyear ended 31 December 2005. Certain new standards and interpretations have been published that are mandatoryfor the Group's accounting periods beginning on or after 1 January 2007 or laterperiods and which the Group has not early adopted. These new standards and interpretations are not expected to significantly affectthe Group's financial statements when adopted: IFRS 7, Financial Instruments:Disclosures and a Complementary Amendment to IAS 1 Presentation of FinancialStatements - Capital Disclosures (effective from 1 January 2007); IFRIC 7,Applying the Restatement Approach under IAS 29 (effective for annual periodsbeginning on or after 1 March 2006); IFRIC 8, Scope of IFRS 2 (effective forannual periods beginning on or after 1 May 2006); and IFRIC 9 Reassessment ofEmbedded Derivatives (effective for annual periods beginning on or after 1 June2006); and IFRIC 10, Interim Financial Reporting and Impairment (effective forannual periods beginning on or after 1 November 2006). New or amended standards and interpretations effective for the Group from 1January 2006 are discussed below. None of the adoptions had a material impact on the Group's financial position orresults of operations. IFRIC 4, Determining whether an Arrangement contains a Lease ("IFRIC 4"). IFRIC4 provides guidance on how to determine whether an arrangement contains a leaseas defined in IAS 17, Leases, on when the assessment or reassessment of anarrangement should be made and on how lease payments should be separated fromany other elements in the arrangement. IAS 39 (Amendment), The Fair Value Option; IAS 39 (Amendment), Cash Flow HedgeAccounting of Forecast Intragroup Transactions; IAS 39 (Amendment), FinancialGuarantee Contracts. The amendments to IAS 39 clarified the use of the fairvalue through profit or loss category of financial instruments and clarified theaccounting for financial guarantees as either insurance contracts or financialinstruments. IAS 19 (Amendment), Employee Benefits. The amendment to IAS 19 introduces anadditional recognition option for actuarial gains and losses in post-employmentdefined benefit plans. IFRS 1 (Amendment), First-time Adoption of International Financial ReportingStandards and IFRS 6 (Amendment), Exploration for and Evaluation of MineralResources. The amendments to IFRS 1 and IFRS 6 provided limited relief tofirst-time adopters of IFRS with respect to the provisions of IFRS 6. IFRIC 5, Rights to Interests arising from Decommissioning, Restoration andEnvironmental Rehabilitation Funds ("IFRIC 5"). IFRIC 5 provides guidance on theaccounting for interests in decommissioning funds. IFRIC 6, Liabilities arising from Participating in a Specific Market - WasteElectrical and Electronic Equipment ("IFRIC 6"). IFRIC 6 addresses theaccounting for liabilities under an EU Directive on waste management for salesof household equipment. Note 5: Acquisition of OOO Dulisma and OOO LTK In April 2006, the Group acquired a 100 percent stake in OOO NK Dulisma ("Dulisma") and OOO Lenskaya Transportnaya Kompaniya ("LTK") for $135 million netof debt at amount of $15 million. Dulisma holds exploration and productionlicenses in Irkutsk. Net losses of $0.3 million associated with Dulisma wereincluded in the Group's results for the six months ended 30 June 2006. Nogoodwill was recognized in relation to the acquisition of Dulisma and LTK. The table below presents the preliminary fair values of 100 percent of Dulisma'sand LTK's assets and liabilities as of the date of acquisition. No informationon the IFRS carrying values before the acquisition is available as Dulisma andLTK did not prepare IFRS financial statements prior to the acquisition. Fair values at acquisition Cash and cash equivalents 61Accounts receivable and prepayments 2,216Other current assets 2,474Oil and gas properties and equipment 194,297Short-term borrowings and current portion of long-term borrowings (399)Other current liabilities (18,507)Deferred income tax liability, non-current (44,378) Net assets 135,764Less: minority interest - Share in net assets acquired less minority interest 100%Purchase consideration share in net assets acquired 135,764 Excess of the Group's share in -net assets over purchase consideration Included within oil and gas properties and equipment acquired with Dulisma andLTK are property acquisition costs with a fair value of $113.7 million that arenot subject to depletion pending the results of management's assessment of theeconomic viability of the properties. Additionally, included within oil and gasproperties and equipment acquired with Dulisma and LTK are property acquisitioncosts with a fair value of $26.7 million that are being depleted over totalproved reserves. Group Dulisma Adjustments Summary results and and combined LTK elimination Total revenues 78,444 2,389 (991) 79,842Profit (loss) for the period 3,790 (747) 332 3,375 Note 6: Equity Share activity. In May 2006, the Group's shareholders approved a resolutionincreasing the authorized shares be 130 million to 250 million. Also in May2006, the Group completed a private placement of its shares. Proceeds from theissuance totalled $195.1 million, net of associated expenses of $14.0 million. Share activity for the six months ending 30 June 2006 is outlined in the tablebelow. Number of shares Share capital Share premium outstanding $ thousands $ thousands (thousands) At 31 December 2005 86,911 460 201,355 Private placement 31,089 173 194,961 At 30 June 2006 118,000 633 396,316 Share-based payments. In February 2006, the Group's Board of Directors approveda Restricted Stock Plan (the "Plan") authorizing the Compensation Committee ofthe Board of Directors to issue restricted stock of up to five percent of theoutstanding shares of the Group. Upon adoption, the Group issued 1,332,330shares of restricted stock. The vesting schedule for the restricted stockvaries by individual award and, of the February 2006 grant, 811,080 shares,260,625 shares and 260,625 shares vest on 1 January 2007, 2008 and 2009,respectively. The total cost associated with the award was $6.58 million. Such cost will berecognized over the vesting periods of the grants. During the six months ended30 June 2006, the Group recognized $2.29 million in compensation expenseassociated with the Plan. Such amount was recognized within selling, generaland administrative expenses in the interim consolidated condensed statement ofoperations. Note 7: Cost of Sales Period ended 30 June: 2006 2005 Unified production tax 16,744 5,588Depreciation and depletion 7,784 2,706Wages and salaries including payroll taxes 7,046 2,270Cost of purchased production 2,324 -Materials 2,702 1,088Other taxes 968 416Other 2,566 664 Total cost of sales 40,134 12,732 Note 8: Selling, General and Administrative Expenses Period ended 30 June: 2006 2005Wages and salaries 4,248 2,224Audit and professional consultancy fees 2,024 223Office rent and other expenses 596 89Transport and storage services 2,277 365Loading services 240 445Loss on disposal of assets 202 -Share-based payments 2,285 -Other expenses 1,655 1,791 Total selling, general and administrative expenses 13,527 5,137 Note 9: Borrowings All borrowings outstanding at 30 June 2006 and 31 December 2005 were denominatedin US Dollars. Short-term borrowings. Short-term borrowings and current portion of long-termborrowings were as follows at30 June 2006 and 31 December 2005. 30 June 31 December 2006 2005 Current portion of long-term borrowings 22,656 34,117Total short-term borrowings and current portion of long-term borrowings 22,656 34,117 Long-term borrowings. Long-term borrowings were as follows at 30 June 2006 and31 December 2005. 30 June 31 December 2006 2005 BNP Paribas Subordinated Loan 10,395 -BNP Paribas Reserve Based Loan Facility 62,835 69,000Bank Zenit - 12,000Other 561 122 73,791 81,122 SubtotalLess: current portion of long-term borrowings (22,656) (34,117) 51,135 47,005 Total long-term borrowings Subordinated Loan. In January 2006, the Group obtained a $12.0 millionsubordinated loan from BNP Paribas (the "Subordinated Loan"). The SubordinatedLoan bears interest at LIBOR plus 5.0 percent and is repayable over five yearsin one payment on 10 November 2010. Attached to the Subordinated Loan werewarrants to purchase up to two million of the Group's common stock for £3.03.The warrants are exercisable at any time and expire in November 2010. The Groupused the proceeds from the Subordinated Loan to repay its debt to bank Zenit of$12.0 million. Management has estimated the value of the warrants to be $1.75 million. Thisamount has been recorded within equity in the Group's consolidated balancesheet, with a corresponding reduction in the carrying value of the SubordinatedLoan. The difference between the carrying value and the face value of theSubordinated Loan is accreted over the term to maturity as interest expense atan effective rate of 3.3 percent. Note 9: Borrowings (Continued) Interest expense. Interest expense for the periods ended 30 June 2006 and 2005comprised the following: Period ended 30 June: 2006 2005 Short-term borrowingsAlfa Eco M - 923Related party borrowings - 559Related party borrowings converted into equity - 540Nimir - 490BNP Paribas Pre-export Loan - 410Zenit 127 62Other short-term borrowings 466 202 Total interest expense associated with short-term borrowings 593 3,186 Long-term borrowingsBNP Paribas Subordinated Loan- interest at coupon rate 492 -- amortisation of issuance costs and discount associated with warrants 174 -BNP Paribas Reserve Based Loan Facility- interest at coupon rate 3,330 -- amortisation of issuance costs 374 - Total interest expense associated with long-term borrowings 4,370 - Financial leasing 80 156 Capitalized interest expense (793) (125) Interest incomeJP Morgan Liquidity Fund (466) -Related party loans issued (64) -Bank deposit (235) - Total interest income (765) - Total finance costs 3,485 3,217 Note 10: Related-Party Transactions For the purposes of the interim consolidated financial information, parties areconsidered to be related if one party has the ability to control the otherparty, is under common control, or can exercise significant influence over theother party in making financial or operational decisions as defined by IAS 24,Related Party Disclosures. In considering each possible related partyrelationship, attention is directed to the substance of the relationship, notmerely the legal form. Below are the related party transactions for the six months ended 30 June 2006and 2005: Six months ended 30 June: 2006 2005 - 4,399 Sales of crude oil on export markets Associated volumes, tons - 13,580 Interest expense/(income), net (64) 1,099Office rent paid (included in selling, general and administrative expense) 242 172Other expenses 17 - Sales of crude oil to related parties. Through September 2005 the Group enteredinto transactions in the ordinary course of business with ZAO NC Urals, UralsARA NV and Nafta (B) NV which all are controlled by major shareholders. Thesetransactions included sales and purchases of crude oil and petroleum products.Such transactions substantially ended beginning September 2005. Interest expense. In first half of 2005 of the $1,099 of interest expense $559was paid in cash to UEN Trading and the rest relates to shareholders' loanswhich were converted into equity in August 2005. Compensation to senior management.The Group's senior management team comprises12 people whose compensation totaled $6.778 million, including salary andbonuses of $4.493 million, and stock compensation of $2.285 million. Below are the related party balances as of 30 June 2006 and 31 December 2005: 30 June 31 December 2006 2005 Accounts and notes receivable 1,474 1,474Loans receivable 1,251 1,251Interest receivable 141 77Trade advances received 92 3Other payables and accrued expenses 74 74 Note 11: Contingencies, Commitments and Operating Risks Operating environment. The Russian Federation continues to display somecharacteristics of an emerging market. These characteristics include, but arenot limited to, the existence of a currency that is not yet full convertible inmost countries outside of the Russian Federation, and relatively high inflation.The tax and customs legislation within the Russian Federation is subject tovarying interpretations and changes that can occur frequently. The future economic direction of the Russian Federation is largely dependentupon the effectiveness of economic, financial and monetary measures undertakenby the Government, together with tax, legal, regulatory, and politicaldevelopments. Sales and royalty commitments. In accordance with the sale purchase agreementto acquire Petrosakh, the Group agreed to pay a perpetual royalty to theprevious shareholders of $0.25 per ton of crude oil produced from the currentlyunproved off-shore licensed area. There was no production from the area in2006. This amount will be recognized within selling, general and administrativeexpenses within the consolidated statement of operations when first productionstarts. Oilfield licenses. The Group is subject to periodic reviews of its activitiesby governmental authorities with respect to the requirements of its oil fieldlicenses. Management of the Group correspond with governmental authorities toagree on remedial actions, if necessary, to resolve any findings resulting fromthese reviews. Failure to comply with the terms of a license could result infines, penalties or license limitations, suspension or revocations. The Group's management believes any issues of non-compliance will be resolvedthrough negotiations or corrective actions without any materially adverse effecton the financial position or the operating results of the Group. In January 2006, an extension of the Pogranichnoye License area offshoreSakhalin Island was granted by the Russian Federal Agency for Natural Resources. Under the terms of the grant, the license period was extended to 1 February2011. The terms of the amended license require a total of five explorationwells to be drilled during the period 2005-2010. The East Okruzhnoye No. 1 wellspudded in 2005 will qualify as the first of the five exploration wells requiredby the amended license. Urals Nord has five geological studies licenses which expire in January 2008.According to the license agreement terms Urals Nord is required to drillexploration wells and perform seismic works. Management currently does not believe that any of its significant exploration orproduction licenses are at risk of being withdrawn by the licensing authorities. Additionally, management currently plans to complete all the requiredexploration or development work, as appropriate, within the timetablesestablished in the licenses. Taxation. Russian tax, currency and customs legislation is subject to varyinginterpretations, and changes, which can occur frequently. Management'sinterpretation of such legislation as applied to the transactions and activityof the Group may be challenged by the relevant regional and federal authorities.Recent events within the Russian Federation suggest that the tax authorities maybe taking a more assertive position in their interpretation of the legislationand assessments, and it is possible that transactions and activities that havenot been challenged in the past may be challenged. As a result, significantadditional taxes, penalties and interest may be assessed. Fiscal periods remainopen to review by the authorities in respect of taxes for three calendar yearspreceding the year of review. Under certain circumstances reviews may coverlonger periods. Management believes that its interpretation of the relevant legislation isappropriate and the Group's tax, currency and customs positions will besustained. Where management believes it is probable that a position cannot besustained, an appropriate amount has been accrued for in these financialstatements. Note 11: Contingencies, Commitments and Operating Risks (Continued) Insurance policies. At 30 June 2006, the Group held limited insurance policiesin relation to its assets, operations, or in respect of public liability orother insurable risks. Since the absence of insurance alone does not indicate anasset has been impaired or a liability incurred, no provision has been made inthese financial statements. In August the company insured all of its majorassets, including oil in stock, for a total value of $ 90 million. Also, aliability insurance policy was put in place, including environmental liability,with a total limit of $ 7.8 million. Restoration, rehabilitation and environmental costs. The Group companies haveoperated in the upstream and refining oil industry in the Russian Federation formany years and its activities have had an impact on the environment. Theenforcement of environmental regulations in the Russian Federation is evolvingand the enforcement posture of government authorities is continually beingreconsidered. The Group periodically evaluates its obligation related thereto.The outcome of environmental liabilities under proposed or future legislation,or as a result of stricter enforcement of existing legislation, cannotreasonably be estimated at present, but could be material. Under the currentlevels of enforcement of existing legislation, management believes there are nosignificant liabilities in addition to amounts which are already accrued andwhich would have a material adverse effect on the financial position of theGroup. Legal proceedings. The Group is involved in a number of court proceedings (bothas a plaintiff and a defendant) arising in the ordinary course of business. Inthe opinion of management, there are no current legal proceedings or otherclaims outstanding, which could have a material effect on the result ofoperations or financial position of the Group and which have not been accrued ordisclosed in these consolidated financial statements. Other capital commitments. At 30 June 2006, the Company had no significantcontractual commitments for capital expenditures. REVIEW REPORT OF THE AUDITORS To the Shareholders and Board of Directors of Urals Energy Public CompanyLimited 1. We have reviewed the accompanying condensed consolidated interim balancesheet of Urals Energy Public Company Limited and its subsidiaries (the "Group")as at 30 June 2006, and the related condensed consolidated interim statements ofincome, cash flows and of changes in equity for the six months then ended aspresented on pages 1 through 14. This condensed consolidated interim financialinformation is the responsibility of the Group's management. Our responsibilityis to issue a report on this condensed consolidated interim financialinformation based on our review. 2. We conducted our review in accordance with the International Standard onReview Engagements 2400. This Standard requires that we plan and perform thereview to obtain moderate assurance about whether the condensed consolidatedinterim financial information is free of material misstatement. A review islimited primarily to inquiries of company personnel and analytical proceduresapplied to financial data and thus provides less assurance than an audit. Wehave not performed an audit and, accordingly, we do not express an auditopinion. 3. Based on our review, nothing has come to our attention that causes us tobelieve that the accompanying condensed consolidated interim financialinformation has not been properly prepared, in all material respects, inaccordance with International Accounting Standard 34, Interim FinancialReporting. Moscow, Russian Federation 4 September 2006 This information is provided by RNS The company news service from the London Stock Exchange